Corporate governance and financial performance of manufacturing companies in Indonesia

I Putu Sisna Armawan; I Ketut Yadnyana; Made Gede Wirakusuma; Eka Ardhani Sisdyani

doi:10.21744/ijbem.v9n3.2495

Authors

I Putu Sisna Armawan
sisna.armawan11@gmail.com
Udayana University, Denpasar, Indonesia
I Ketut Yadnyana Udayana University, Denpasar, Indonesia
Made Gede Wirakusuma Udayana University, Denpasar, Indonesia
Eka Ardhani Sisdyani Udayana University, Denpasar, Indonesia

Keywords:

Corporate governance, agency theory, financial performance, return on assets, fixed effect model

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.

Downloads

Download data is not yet available.

References

Abdullah, H., & Tursoy, T. (2023). The effect of corporate governance on financial performance: Evidence from a shareholder-oriented system. Iranian Journal of Management Studies (IJMS), 16(1), 70–95.

Agrawal, N., & Lakshmi, V. (2020). Board composition and board size impact on financial performance of the company. International Journal of Public Sector Performance Management, 6(5), 737–747.

Aguilera, R. V., & Crespi-Cladera, R. (2016). Global corporate governance: On the relevance of firms’ ownership structure. Journal of World Business, 51(1), 50-57. https://doi.org/10.1016/j.jwb.2015.10.003

Ali, S., Naseem, M. A., Jiang, J., Rehman, R. U., Malik, F., & Ahmad, M. I. (2022). “How” and “When” CEO duality matter? Case of a developing economy. SAGE Open, 12(3).

Al-Jalahma, A. (2022). Impact of audit committee characteristics on firm performance: Evidence from Bahrain. Problems and Perspectives in Management, 20(1), 247–261.

Al-Okaily, J., & Naueihed, S. (2019). Audit committee effectiveness and family firms: Impact on performance. Management Decision, 58(6), 1021–1034.

Anas, M., Gulzar, I., Tabash, M. I., Ahmad, G., Yazdani, W., & Alam, M. F. (2023). Investigating the nexus between corporate governance and firm performance in India: Evidence from COVID-19. Journal of Risk and Financial Management.

Arifai, M., Tran, A. T., Moslehpour, M., & Wong, W.-K. (2018). Two-tier board system and Indonesian family owned firms performance. Management Science Letters, 8, 737–754.

Arnaboldi, F., Casu, B., Kalotychou, E., & Sarkisyan, A. (2018). The performance effects of board heterogeneity: What works for EU banks? The European Journal of Finance, 26(10), 897–924.

Astami, E., Pramono, A. J., Rusmin, R., Cahaya, F. R., & Soobaroyen, T. (2024). Do family ownership and supervisory board characteristics influence audit report lag? A view from a two-tier board context. Journal of International Accounting, Auditing and Taxation, 56, 100638. https://doi.org/10.1016/j.intaccaudtax.2024.100638

Bahari, S. (2024). The impact of board size and audit committee characteristics on financial performance in foreign exchange banks: Evidence from Indonesia. Jurnal Penelitian Ipteks, 9(1), 85–101.

Cancela, B. L., Neves, M. E. D., Rodrigues, L. L., & Gomes Dias, A. C. (2020). The influence of corporate governance on corporate sustainability: new evidence using panel data in the Iberian macroeconomic environment. International Journal of Accounting & Information Management, 28(4), 785-806.

Chatterjee, C., & Nag, T. (2022). Do women on boards enhance firm performance? Evidence from top Indian companies. International Journal of Disclosure and Governance, 20(2), 155–167.

Chi, C. G., & Gursoy, D. (2009). Employee satisfaction, customer satisfaction, and financial performance: An empirical examination. International journal of hospitality management, 28(2), 245-253. https://doi.org/10.1016/j.ijhm.2008.08.003

CNBC. (2024a). Kronologi bangkrutnya Raja Tekstil Sritex, tumbang ditelan utang. CNBC Indonesia.

CNBC. (2024b). Tanda awal kasus Indofarma, laba jeblok 99,65% tapi hasil audit wajar. CNBC Indonesia.

Dahlia, R., & Permatasari, Y. (2024). CEO duality and financial performance during COVID-19. Jurnal Akuntansi dan Auditing, 21(2), 254–268.

Famba, T., Chiriseri, L., Chituku-Dzimiro, G., & Kurauone, O. (2024). Two-tier corporate board structure, corporate governance reforms and financial performance of firms listed on the China stock market. SN Business & Economics, 4(11).

Firdiansjah, A., Apriyanto, G., & Widyaratna, L. (2020). Analysis of CEO duality influence and corporate social responsibility toward financial performance through earnings management. International Journal of Scientific & Technology Research, 9(1).

Hassan, M. K., Rabbani, M. R., Brodmann, J., Bashar, A., & Grewal, H. (2023). Bibliometric and Scientometric analysis on CSR practices in the banking sector. Review of Financial Economics, 41(2), 177-196.

Hidayat, N., Situmorang, M., & Widyowati, M. P. (2024). Pengaruh ukuran dewan direksi, dewan komisaris dan ukuran perusahaan terhadap kinerja keuangan. JATAMA: Jurnal Akuntansi Pratama, 1(4).

Hindasah, L., Supriyono, E., & Ningri, L. J. (2021). The effect of good corporate governance and firm size on financial performance.

IDX. (2026). Tata kelola perusahaan. Retrieved from https://www.idx.co.id/id/tentang-bei/tata-kelola-perusahaan

Intia, L. C. (2021). Pengaruh dewan direksi, dewan komisaris independen dan dewan pengawas syariah terhadap kinerja keuangan perbankan syariah di Indonesia, 7(2), 46–59.

Jao, R., Randa, F., Holly, A., & Gohari, L. (2021). Pengaruh karakteristik dewan direksi terhadap kinerja keuangan perusahaan non keuangan yang terdaftar di Bursa Efek Indonesia. Akmen, 18(2), 123–134.

Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3, 305–360.

Jin, T. (2021). The influence of board size and CEO duality on firm performance: A research on Taiwan listed firms. 12(6), 533–539.

Kalsie, A., & Shrivastav, S. M. (2016). Analysis of board size and firm performance: Evidence from NSE companies using panel data approach. Indian Journal of Corporate Governance, 9(2), 148–172.

Krisnadewi, K. A., & Soewarno, N. (2020). Competitiveness and cost behaviour: evidence from the retail industry. Journal of Applied Accounting Research, 21(1), 125-141.

Kufo, A., & Shtembari, E. (2023). How board size and board independence affect insurance companies’ performance. European Journal of Interdisciplinary Studies, 15(1), 68–80.

Kyere, M., & Ausloos, M. (2020). Corporate governance and firms financial performance in the United Kingdom. International Journal of Finance & Economics, 26(2), 1871–1885.

Lesmana, D., Naprida, D., & Wibowo, B. R. (2024). COVID-19 pandemic and firm performance in emerging market: The role of corporate governance. Corporate Law and Governance Review, 6(1), 57–68.

Lew, Y. K., Yu, J., & Park, J.-Y. (2017). The impacts of independent director and CEO duality on performance in the Chinese post-institutional-transition era.

Musallam, S. R. M. (2020). Effects of board characteristics, audit committee and risk management on corporate performance. International Journal of Islamic and Middle Eastern Finance and Management, 13(4), 691–706.

Napitupulu, I. H., Situngkir, A., Basuki, F. H., & Nugroho, W. (2020). Optimizing good corporate governance mechanism to improve performance: Case in Indonesia’s manufacturing companies. Global Business Review, 24(6), 1205–1226.

Noliviasari, C., & Siswantoro, E. (2022). The board of directors, firm size, capital structure, financial performance during the COVID-19 crisis: Evidence from Indonesia. International Journal of Entrepreneurship and Business Management, 1(2), 96–104.

Palupi, A. (2023). Does ESG affect the firm value?. Accounting & Finance Review (AFR), 7(4).

Pham, V. L., & Ho, Y.-H. (2024). Independent board members and financial performance: ESG mediation in Taiwan. Sustainability, 16(16), 6836.

Prabowo, M., & Simpson, J. (2011). Independent directors and firm performance in family controlled firms: Evidence from Indonesia. Asian-Pacific Economic Literature, 25(1), 121–132.

Prameswari, N. P. A. S., Suaryana, I. G. A. N., Sujana, I. K., & Rasmini, N. K. (2022). Good corporate governance moderates the effect of corporate social responsibility disclosure, financial distress and managerial ability on earnings management with variable. International Journal of Business, Economics and Management, 5(4), 453-462. https://doi.org/10.21744/ijbem.v5n4.2038

Puni, A., & Anlesinya, A. (2020). Corporate governance mechanisms and firm performance in a developing country. International Journal of Law and Management, 62(2), 147-169.

Putri, L. L., & Deviesa, D. (2017). Pengaruh CEO duality terhadap financial performance dengan earnings management sebagai variabel intervening. Business Accounting Review, 5(1), 169-180.

Roffia, P., Moracchiato, S., Liguori, E., & Kraus, S. (2021). Operationally defining family SMEs: a critical review. Journal of Small Business and Enterprise Development, 28(2), 229-260.

Rompis, N. K., Worang, F. G., & Tulung, J. E. (2018). Pengaruh ukuran dewan, keberagaman usia dan keberagaman gender terhadap kinerja keuangan. Jurnal EMBA, 6(4), 2628–2637.

Rudiwantoro, A. (2022). Pengaruh independensi dewan komisaris, ukuran dewan direksi, komite audit dan ukuran perusahaan terhadap kinerja keuangan. Jurnal Akuntansi dan Bisnis Indonesia, 3(1), 41–51.

Tandiamal, F. G., Daromes, F. E., & Tangke, P. (2025). Pengaruh CEO duality dalam hubungan organizational slack dan ESG terhadap kinerja keuangan. Jurnal Akuntansi dan Auditing, 19(2), 212–242.

Tulung, J. E., & Ramdani, D. (2018). Independence, size and performance of the board: An emerging market research. Corporate Ownership and Control, 15(2–1), 201–208.

Ulupui, I. G. K. A., Utama, S., & Karnen, K. A. (2015). Pengaruh kepemilikan keluarga, kedekatan direksi dan komisaris dengan pemilik pengendali terhadap kompensasi direksi dan komisaris perusahaan di pasar modal Indonesia. Jurnal Organisasi dan Manajemen, 11(1), 62–74.

Uyar, A., Kuzey, C., Kilic, M., & Karaman, A. S. (2021). Board structure, financial performance, corporate social responsibility performance, CSR committee, and CEO duality: Disentangling the connection in healthcare. Corporate Social Responsibility and Environmental Management, 28(6), 1730-1748.

Voveris, D., Jaržemskis, A., & Girdvainien?, I. (2024). The paradox of independent board members and financial return of state-owned enterprises. Problems and Perspectives in Management, 22(1), 205–217.

Zhu, C., Husnain, M., Ullah, S., Khan, M. T., & Ali, W. (2022). Gender diversity and firms’ sustainable performance: Moderating role of CEO duality in emerging equity market. Sustainability, 14(12), 7177.