The effect of corporate governance on firm performance in Indonesia shariah compliant companies

Abstract

The practice of Corporate Governance (CG) is believed as one of the most important part in a corporate which acts as a tool on strategical decision that will lead companies into the better or worse performance. The discussion over the effect of corporate governance on firm performance and based on those researches there is no any consensus in term of how CG should behave. On the other hand, from Islamic point of view, value creation is more encouraged rather than value destruction, additionally, in Islam wealth distribution also encouraged compares to merely profit maximisation. This study aims to investigate the effect of CG variables to firm performance in Shariah Compliant companies in Indonesia. The CG variable used are: board size (BS), board independent (BI), Concentrated Ownership (CO), Ownership Identity (OI), and Largest Shareholder (LS). On top of that, Indonesia is classified as a developing country which ownership highly concentrated and most companies own by family clan. Whereas value of company measured by two methods namely accounting method with return on asset (ROA) and return on equity (ROE), and market-based method with Tobin’s Q (Q) ratio as the proxy. This research also covering further the extension of the quantitative findings with respect to Islamic theory. This study utilises 287 companies as sample from Indonesia Shariah compliant companie over the span 2010-2015 which generated 1772 observations. By employing Generalized Method of Moment (GMM) regression with three different models, the finding shows BS and CO has a positive significant effect on Q whereas, LS has a negative significant effect on Q. At the second Model, BI has a positive significant effect on ROA and LS has a negative significant effect on ROA. Another model in this study depicts that BS has a negative significant effect on ROE while BI has a positive significant effect on ROE. In accordance of the three-model comparison it can be said that the independent director is able to create a value in company due to its expertise and concentrating the ownership to small number of people with ownership more than 5% also will generate value for company due to efficiency in the voting and strategical decision rather than over dispersing or relying only to single rider shareholder.