Description
Case Study of Effectiveness Investments with Social Commitment towards Corporate Value Creation: In the Context of Structure and Mechanism Corporate Governance:- Governance is the act of governing. It relates to decisions that define expectations, grant power, or verify performance. It consists of either a separate process or part of decision-making or leadership processes. In modern nation-states, these processes and systems are typically administered by a government.
Case Study of Effectiveness Investments with Social
Commitment towards Corporate Value Creation: In the
Context of Structure and Mechanism Corporate
Governance
Abstract
The objective of this paper was to investigate the association between the structure and mechanism of corporate
governance and firm value mediated by the effectiveness of investments with social commitment that derived from
synthesis of Agency and Stakeholder theories. The study was conducted to all corporations in the Indonesian Stock
Exchange during 2009 - 2011. This study was expected to provide new insights on the synergistic effects of investment
discretion that synchronizes between economic and social orientation as suggested in the finance literature, an area had not
been examined in the prior studies. The result of this study can resolve the existing conflict in the literatures.
Effectiveness investments with social commitment mediate the relationship between structures and mechanisms of
corporate governance in the aspect of ownership concentration and the intensity role of the board toward firm value. The
finding of this research, the most dominant path was effect of the intensity role of the board on firm value through
effectiveness of investment with social commitment and corporate reputation. This suggests that the mechanism of
corporate governance was more effective than the structure of corporate governance toward firm value.
Keywords: Effectiveness of investment with social commitment; corporate governance; ownership concentration;
managerial ownership; intensity role of board; reputation; firm value.
1. Introduction
The study Berle and Means (1932) explicitly states about the necessity for separation between ownership and
management of the company, so that the distribution of shares in the company becomes an important issue. At the time of
the corporate management no longer do by the principal but handed over to the agent, then potential conflict in the
relationship between owners and managers, which is often referred as the agency problem (Jensen and Meckling, 1976).
In terms of ownership, there are two issues of agency, which the agency problem between majority shareholders and
minority shareholders (Shleifer and Vishny, 1997), and agency problems between management and shareholders (Jensen
and Meckling, 1976). Agency conflicts as mentioned above by Shleifer and Vishny (1997) can be resolved in one way is
through good corporate governance.
The literature on corporate governance structures and mechanisms identified three important corporate governance is
the board of directors, disclosure and ownership structure. However, based on empirical research there is no unanimity
among researchers about the impact of the structure and mechanism of corporate governance on corporate performance.
According to Gill et al. (2009), temporary literature suggests the findings agreed on the positive relationship between
disclosure and corporate performance, but the relationship between the board of directors and ownership structure on
corporate performance shows mixed results.
Implementation of good corporate governance as an instrument to mitigate conflicts of interest in the public companies
in Indonesia has not been fully working optimally. The fact was supported by the results of a survey of national
institutions and international level about the implementation of good corporate governance (GCG) in Indonesia which
global investors' perceptions about the management of the corporation in Indonesia was still weak (Daniri, 2006); the
results of the World Bank and McKinsey survey shows that investors have a preference for avoiding corporate enterprise
with poor corporate governance (McKinsey and Co, 2002).
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The next phenomenon is the increase in the complexity and dynamics of the business environment at the moment
encouraged companies to think about sustainability in a corporate goal orientation. According Elkington (1997),
sustainability is a balance between people, planet, and profit, which is known as the concept of the Triple Bottom Line
(TBL). Frame of mind and the concept of sustainability were lies at the interface between the three aspects, people-
social, planet-environmental, and profit- economic. Companies should be responsible for the positive and negative impact
caused to the economic, social and environmental. Sustainability is the end goal to be achieved by all companies. The
ultimate goal of which is to balance between economic performance, social welfare, and the rejuvenation and
preservation of the environment. Process of achieve the ultimate goal is referred to as sustainable development and to
achieve the ultimate goal, it takes a vehicle in contributing to sustainability is called Corporate Social Responsibility
(Panapanaan et al., 2003). Activity of Corporate Social Responsibility is an integral part of good corporate governance.
Oriented social responsibility to stakeholders, which is in line with one of the main principles of Good Corporate
Governance that is responsibility. At this time there has been a paradigm shift in Good Corporate Governance is to extend
the theoretical paradigm of agency theory to the stakeholder theory perspective. The consequences of the paradigm shift
of Good Corporate Governance should pay attention to issues of corporate social responsibility.
Theoretical models developed in this study proposes a concept that can contribute to addressing gaps or
inconsistencies in the results of empirical research on the effect of corporate governance on firm value and
accommodate business phenomena associated with the implementation of corporate governance of public companies in
Indonesia. The concept is a derivation from synthesis agency and stakeholder theory that leads to the achievement of
corporate policy of sustainable performance through investment strategies oriented in domains that are morefriendly to
stakeholders called effectiveness investment with social commitment. Discretion of investment based on asset effectively
with economic and social orientation committed equally and simultaneously predictable impact on the reputation and
increasing corporate value. The objectives of this research are: (1) Developing theoretical models in an attempt to resolve
the conceptual and empirical controversy about the influence of corporate governance structures and mechanisms from the
aspect of ownership structure and board of directors on firm value of listed companies in Indonesia; (2) Synthesize and
test empirically the effectiveness investments with social commitment as a mediating influence corporate governance
structure and mechanism from the aspects of ownership structure and board of directors on firm value.
2. Effectiveness of Investments with Social Commitment
2.1 State of the art
Synthesis of agency and stakeholder theory related to the expansion of the company's goal maximizing value of firm.
According agency theory, firm objective is to maximizing firm value for benefit of shareholders. But on the other hand, a
firm can not maximize value if it ignores the interests of stakeholders. Jensen (2001) gives a solution to the conflict
between maximizing firm value for shareholder benefit and stakeholder theory with fusion joi nt between the enlightened
value maximization and enlightened stakeholder theory.
In the long term, the goals of social and economic are not inherently in conflict with each other but are integrally
connected. Achievement of these objectives is described through the linkage of corporate social performance (CSP) and
corporate financial performance (CFP) which is a combination of social and economic benefits. CSP and CFP is not a
concept that trade off each other and even both are concepts which have a positive relationship and complementary.
Both of them are a concept of alignment of interests between shareholders and stakeholders. This concept is supported
Orlitzky et al. (2003) which uses the principles of agency theory to build a positive relationship of CSP to CFP. In his
article mentioned that building relationships with stakeholders serves as a monitoring and enforcement mechanism that
prevents managers to forget the purpose of the broader financial organizations. Negotiation process and the explicit and
implicit contracts with stakeholders based on mutual relations and bilateral, preventing managers from diverting attention
to organization-wide financial objectives (Hill and Jones, 1992, Jones 1995).
In addition, by addressing and balancing the claims of various stakeholders (Freeman and Evan, 1990), managers can
improve the efficiency of their organizational adaptation to external demands. These methods will lead to lower agency
costs resulting in a positive relationship between CSP and CFP. State of the art proposition Investment Effectiveness
with Social commitments can be illustrated by the diagram of Figure 1.
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2.2 Proposition
Based on the theoretical study of the synthesis between the Agency and Stakeholder theory, substantial theoretical and
empirical research above it can be derived that a proposition Effectiveness Investment with Social commitments.
Effectiveness Investments with Social commitment is an investment based asset that synchronizes economic motives and
commitment to social orientation. Investment based on assets with economic orientation was measured using corporate
financial performance (CFP) and investment with social commitment was measured with corporate social performance
(CSP) (Elkington, 1997; Fauzi et al., 2011). CFP and CSP synchronization is based on virtous cyrcle which stated that
there is no trade-off between CSP and CFP (Preston and O'Banon, 1997; Waddock and Graves, 1997;
Orlitzky et al., 2003; Wissink, 2011)
Effectiveness investments with social commitment is a strategy for optimizing the use of assets of the company which
has the objective to maintain business sustainability by shifting its focus from the maximization of profit (shareholder
oriented) to maximize value creation for all stakeholders (stakeholders and shareholders oriented). Effectiveness
investments with social commitment are corporate strategic outcomes as the impact of structures and mechanisms of
corporate governance in the context of the ownership structure and the role of the board of directors. Extend and intensity
of the role of the board of directors in the mechanisms of corporate governance is an important factor to encourage
executives to achieve the effectiveness of investments with social commitment (Hung, 2011). Effectiveness of investment
with social commitment has a positive impact on corporate reputation and corporate value creation. Effectiveness of
investments with social commitment is a mediating factor of the relationship between the structure and mechanism of
corporate governance on firm value creation. Based on the description above, it can be formulated in the following
proposition statement.
Proposition:
Effectiveness investment with social commitment is an investment based on asset that synchronizes economic
orientation and commitment to social orientation. Effectiveness Investment with Social commitment will have a
positive impact on the reputation and firm value. Effectiveness Investment with Social commitment mediate the
effect of structure and mechanisms of corporate governance in aspects of ownership structure and board of
directors toward corporate value creation.
Effectiveness of investments with social commitment was measured with a combined (jointly) between company
financial performance and corporate social performance. The use of these measures is based on the assumption that
combining the two measures provides a synergistic effect. Corporate financial performance is measured by using Asset
Turnover Ratio proxy. Corporate social performance is measured by the index of corporate social responsibility
disclosure. Empirical basis of measure selection can be described as follows:
1) Investment based on asset with economic orientation used Asset Turnover Ratio as proxy (Kallapur dan Trombley,
1999; Gaver and Gaver, 1993; Skinner, 1993; Florackis dan Ozkan, 2009). Asset turnover ratio is defined as the ratio
of total sales to total assets. This ratio is used in the context of the agency by Ang, et al. (2000) and Danielson and
Scott (2007) to construct an index of agency costs. The assumptions used are agency costs reflect the degree of
separation between ownership and control. Approach using two alternative measures agency cost. Proxy is also
adopted by Singh and Davidson (2004); Fleming, et al. (2005); and Porras and Mateo (2011). This proxy interpreted
by asset utilization ratio which shows how management effectively deploys asset. A higher asset turnover ratio shows
a good investment decision or may create a high return. This suggests that corporate governance mechanisms to
reduce conflicts between managers and shareholders may be significant (Florackis and Ozkan, 2009).
2) CSR Disclosure Index. Socially responsible investment is CSR performance using proxy CSR Disclosure Index.
CSR reporting, or social disclosure, is a strategic plan by the company to demonstrate a company's social
performance to stakeholders (Roberts, 1992), in other words, to understand CSR reporting as part of the dialogue
between the company and the stakeholders (Gray et al., 1995). Therefore, stakeholder theory provides a useful
framework for evaluating CSR activities through social reporting (Snider et al., 2003). CSR disclosure is a form of
corporate social responsibility towards stakeholders. Corporate social accountability in the report submitted with the
form of mechanisms that companies report to the parties concerned in the form of financial statements, annual reports
and other types of reports. The report is the form of the provision of financial and non-financial organizations with
respect to the interaction with the physical and social environment, as stated in the annual
147
report or a separate social report (Hackston dan Milne, 1996). Corporate social disclosures include details of the
physical environment, energy, human resources, products and community involvement matters. To find out the
extent of social disclosure level is determined by how many items of the type of social disclosure in reports through
content analysis procedures (Krippendoff, 2004 and Neuendrof, 2011).
2.3 Hypothesis Development
2.3.1 Ownership Concentration and Managerial Ownership as the Corporate Governance Structure and its influence
on Effectiveness Investment with Social commitment and Corporate Value
The presence of concentrations of ownership characterized by dominant shareholders control corporate behavior
affects the organization's goals and how the control is done in the company (Thomsen dan Pedersen, 2000). High
percentage of shares held by shareholders makes it possible to conduct important transactions without the other
shareholders can intervention (Destefanis dan Sena, 2007). Anderson et al. (2003) argues that the dominant shareholder
different from the other shareholders in the two aspects: (a) interests of long-term corporate survival; (b) the importance
of maintaining their own reputation is strongly associated with the company. This suggests that the dominant
shareholders, compared with other types of owners, will be more likely to adopt decisions that maximize the firm's
behavior economic, social and environmental. Other empirical studies support (Syriopoulos et al., 2007; Andres,
2008; Dinga dan Stratling, 2009; Mandaci dan Gumus, 2010; Salami, 2011), it can be formulated hypothesis:
H1a: Ownership concentration has a positive effect on firm value.
H1b: Ownership concentration has a positive effect on Effectiveness investment with Social commitment.
H 1 c: Effect of Ownership Concentration on Firm Value mediated by Effectiveness Investment with Social
commitments.
Theoretically, there are two main hypotheses about the impact of managerial ownership on firm value. Convergence of
interest hypothesis linking the role of managerial ownership and corporate performance (Jensen and Meckling, 1976;
Jensen, 1993), propose that the shareholding managers will assist in aligning the interests of shareholders and managers.
Entrenchment hypothesis proposed by Stulz (1988) explained that the higher managerial ownership will cause a decrease
in the value of the company. Managers who have a large number of shares that will likely entrenched in his position. As a
result, the investment decision is non-value maximizing that firm value will decrease (Chen et al., 2003; Lundstrum, 2009;
Mandaci and Gumus, 2010).
The result of relationship between managerial ownership and firm value is still conflicting shows two main directions
(Iturriaga dan Sanz, 2001). First, several studies have detected a non-monotonic relationship between managerial
ownership and firm value (Morck et al.,1988; McConnel and Servaes, 1990; Cho, 1998). This led to doubts about the
allegations an alignment of interest resulting from the presence of managerial ownership. Second, as it says Jensen and
Meckling (1976), that investment decisions can serve as a transition mechanism between managerial ownership with firm
values. Results of research Iturriaga and Sanz (2001) shows the reciprocal relationship between firm value, investment
and managerial ownership. Chan Du dan Jia Wu (2011) suggests that CEO stock option holders significant positive effect
on investment decisions for all model specifications.
Empirical evidence which explains relation between among insider ownership and corporate CSR is not widely studied
and researched in the empirical literature. Managerial ownership is a major source of executive power (Finkelstein, 1992),
and research shows that executives see themselves as mediators of conflicting claims about the organization. Insider
Ownership associated with the powers that be, allowing the ability of the executive to allocate resources among diverse
stakeholders in a manner that ensures continued contribution to stakeholders and extended the company's
prosperity. Based on theoretical and empirical research studies mentioned above, the hypothesis is formulated:
H2a: Managerial ownership has a negative effect on firm value.
H2b: Managerial ownership positively associated with the effectiveness of investments with social
commitment.
H2c: Effect of Managerial Ownership on Firm Value mediated by Effectiveness Investment with Social
commitments.
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2.3.2 Intensity Role of Board of Directors as Corporate Governance Mechanism and its influence on Effectiveness
Investment with Social commitment and Firm Value
This study using the intensity role of the Board is an approach that needed board to run it functions and its role in
corporate governance mechanisms. Intensity role of board is a combined process that using proxy frequency of board
meetings, among board, with committees and directors (Zahra dan Peace, 1989) and attribute composition using proxy
independence of the board (Setia-Atmaja, 2009; Shan and McIver, 2011).
The Board directors of the company do an important role and thus considered to be an important mechanism Corporate
Governance (Lipton and Lorsch, 1992; Jensen, 1993). Role of the board is to provide advice (expert advice), monitoring
and find accountability (discipline) management to ensure that the managers give priority to the interests of shareholders
(Jensen and Meckling, 1976; Ntim, 2009). Important proxy for measuring the intensity and effectiveness of monitoring
and discipline is the frequency of corporate board meetings (Jensen, 1993; Vafeas, 1999). The theoretical proposition is
that the frequency of board meetings to measure the intensity of the board's activities, and the quality or effectiveness of
monitoring (Vafeas, 1999; Conger et al., 1998; Ntim dan Osei, 2011). Higher frequency of board meetings can produce a
higher quality of managerial monitoring, and thus have a positive impact on the financial performance of the company
(Vafeas, 1999, Ntim, 2009). Regular meetings allow directors more time to negotiate, strategize, and to assess managerial
performance (Vafeas, 1999).
Another proxy used to measure the intensity of the role of board is the independence of the board. Fama dan Jensen
(1983) describes the role of corporate governance mechanisms in controlling agency conflicts. They identified board as
one of the most important of the control of the organization, and highlight the importance of the independence of board in
relation to the ratification and monitoring of management decisions. Specifically emphasized that the board has the power
employ, dismiss, and compensation for top managers and to ratify and monitoring important decisions.
Role in implementing functions of an independent board monitoring and advising as well as the approval of the
company's strategic decisions especially with regard to social interest based on resource dependency theory. Resource
dependence theory suggests that the election of board members outside can be seen as a strategic decision to address the
organization's relationship with its business environment (Pfeffer and Salancik, 1978). In efforts to maintain a positive
relationship with the environment is composed of various stakeholders, outside directors can help companies respond
appropriately to external constituents through comply with environmental standards and participate in various activities
oriented stakeholder (Pfeffer, 1973; Abdur Rouf, 2011; Harjoto and Jo, 2011). Based on theoretical studies and an
overview of some empirical studies on the effect of the frequency of board meetings and board independence
on firm value can be formulated hypothesis:
H3a: Board of Directors with the high intensity of the role of board has a positive effect on firm value.
H3b: Intensity role of board has a positive effect on the effectiveness of investments with social commitment.
H3c: Effect of Intensity role of Board on Firm Value mediated by Effectiveness Investment with Social
commitments.
2.3.3 Association of Effectiveness Investment with Social commitment to Corporate Value and mediation Corporate
Reputation
Resource-based view of the firm provides the appropriate basis for examining how companies create social and
environmental reputation (Hart, 1995; Litz, 1996; Porter & Van Der Linde, 1996; Russo & Fouts, 1997, Waddock &
Graves, 1997). The most important reputation comes from intangible assets. Its interpretation is consistent with the
resource-based view explain the competitive advantage in quality can not be duplicated, including those packaged in
reputation. Recently has been applied specifically to environmental management and competitive advantage. Physical
resources can be easily obtained by competitors (Barney, 1991), while the asset-based social complex can not be imitated
(Hart, 1995). Reputation-based intangible assets become more important contributor to the performance of the company
and the resources are more likely to be valuable and can not be replicated when people demand a cleaner environment
(Russo & Fouts, 1997). Empirical research shows that improving the company's reputation and eventually creates goodwill
has a positive effect on the market value (Chauvin & Hirschey, 1994; Fombrun, 1996).
Accounting disclosure incorporated with signaling hypothesis formed important relationships among perspectives of
resources and corporate governance. Signaling theory remains important because it has the potential of combining
together separate strands of empirical findings on disclosure (Spicer, 1978; Jaggi & Freedman, 1992) and resource-
149
based perspective and governance outlined previously. Toms (2002) offering a theoretical extension of the resource-
based view of the firm to include quality signaling through channel of accounting disclosure. The results showed that the
implementation, monitoring and disclosure of environmental policies and disclosures in the annual report contributed
significantly to the creation of environmental reputation. According Gray et al. (1995), corporate managers disclose social
information in the context to improve the company's image, although he had to sacrifice resources for the event. The
company's image will improve investor confidence in the company so that the value of the company increases. Based on a
review of theoretical and empirical research overview the following hypothesis can be developed:
H4:
H5:
H6:
H7:
Corporate Finance reputation positive effect on Firm Value.
Effectiveness Investment with Social commitment has a positive effect on Corporate Financial
Reputation.
Effectiveness Investment with Social commitment has a positive effect on Firm Value
Effect Effectiveness investment with social commitment to the firm value mediated by corporate
financial reputation.
Based on the hypothesis statements 1 through 7 above can then be arranged in an empirical research model in Figure 2.
3. Research Methods
Object of this research is all the companies listed on the Indonesia Stock Exchange with managerial ownership and
implementing corporate social responsibility activities in years 2009-2011. Sources of data obtained from: (1)
Indonesian Capital Market Directory (ICMD); (2) Corporate Annual report; (3) JSX Monthly Statistics for the January
2009 through December 2011. The data used is panel data with purposive sampling technique. The object of research that
match with criteria as much as 231 observations.
Survey methods used to collect data about the structure and mechanism of corporate governance and social performance.
Social disclosure form of words, numbers, pictures, graphs, and tables and word that show or indicate corporate social
responsibility are disclosed in annual report of the company through content analysis. Social disclosure consists of: (a)
Environment; (b) Energy; (c) Social community involvement and development; (d) Human resources; (e) Product and
customers; (f) Another factor are corporate governance, commitment to CSR and external rewards to company
performance.
Corporate governance structure are measured by the concentration ownership - OC (Lee and O'Neil, 2003; Setia- Atmaja,
2009; Dinga, 2009), and Managerial Ownership - MO (Morck et al., 1988; Bhagat and Black, 2002; Florackis, 2005;
Bhagat and Bolton, 2007; Mura, 2007; Florackis and Ozkan, 2009). Corporate governance mechanism is measured by
the intensity role of board (IRB). Intensity role of board using combined proxy among the frequency of board meetings
(Vafeas, 1999; Conger et al., 1998; Ntim, 2009; Ntim and Osei, 2011) and independence board (Muth and Donaldson,
1998; Hermalin and Weisbach, 2003; Xie et al., 2003; Prasanna, 2006; Tang, 2007; Garg, 2007; Pathan et al., 2007; Javed
and Iqbal, 2007; Samad et al., 2008; Setia-Atmaja, 2009). Effectiveness Investments with Social Commitments (EISC)
measured by multiplying Asset Turnover Ratio (Ang et al., 2000; Singh and Davidson, 2004; Fleming et al., 2005) with
CSR Disclosure Index (Krippendoff, 2004 dan Neuendrof, 2011).
i
EISC=
TS
x
TA
¿ PS
¿ PS
n
(1)
Where, EISC is Effectiveness Investments with Social Commitments; TS is Total Sales; TA is Total Asset; PS
i
is Real
corporate social disclosure; PS
n
is Real social disclosure across the enterprise.
Corporate financial reputation (CR) is measured by the difference in the current year stock price with the previous year
(Neda Vitezic, 2011; Dunbar and Schwalbach, 2000; Roberts and Dowling, 2002; Rose andThomsen, 2004; Neville et al.,
2005; Inglis et al., 2006; Sanchez and Sotorrio, 2007; Zhang and Rezaee, 2009). Corporate financial reputation is
calculated by the following formula.
CR = P
t
÷ P
t
÷1 (2)
Where, CR is Corporate financial reputation; P
t
is closing price in years t; and P
t-1
is closing price in years t-1.
Proxy firm value is Tobin's Q (Copeland et al., 2000; Lidenberg and Ross, 1981). Some researchers are using Tobin's
Q as a proxy for firm value: Demsetz and Villalonga (2001); Brown and Caylor, 2004; Bebchuk et al. (2009); Bhagat and
Bolton (2007); Amman et al. (2010); Bos et al. (2011). Tobin's Q model is calculated using the following formula:
150
Q
=
(EMV +D)
(EBV+D)
(3 )
Where, Q is Firm Value; EMV is Equity Market Value; D is Book value of Debt and EBV is Equity Book Value.
Data were analyzed using path analysis approach with program AMOS 16.0. Based on empirical research model path
diagram, it can be arranged three standardized structural equation, as follows:
EISC = |
11
OC + |
12
MO + |
13
IRB + c
1
(4)
CR = |
21
EISC + c
2
(5 )
Q = |
31
OC + |
32
MO + |
33
IRB + |
34
EISC + |
35
CR + c
3
(6 )
4. Result and Discuss
Table 1 shows the description of the company's observation illustrates that: (1) companies that are observed are mostly
corporate ownership concentration where the average concentration of ownership of 30.79%; (2) managerial ownership
varies widely, the minimum amount of 0.0001%, maximum 52% and average managerial ownership 3.7%; (3) proportion
of independent board average of 43.76% means fulfilling minimum requirement of 30% and an average board meeting is
10 times. The intensity of the role of board on average 4.56 means that the role of board is quite intense.; (4) Value of
Tobin's q has an average of 1.529 shows the average firm observations have value good company; (5) EISC value quite
varied with a minimum value of 0.00015, maximum value 0.656 and average value of 0.145 indicates EISC observations
company perform an investment policy with economic and social motives simultaneously, even though with a
disproportionate weight; (6) reputation with an average of 6.262 indicates that observed firms on average have a positive
reputation.
Testing of model assumptions empirical research has been conducted with the result that the empirical research model
assumptions fulfilled. Multivariate normality of the data can be tolerated and there were no multicollinearity. Evaluation
performed multivariate outliers using the mahalonobis distance calculations are based on the value of the chi-square
distribution table _
2
on the degree of freedom for the number of variables used in the study. This research using 3 variables at level p <
0,001 is _
2
(3;0.001) = 16.27. The data has a Mahalanobis distance greater than 16.27 is considered multivariate outliers. Mahalanobis
distance calculation from the most distant data is 98.269 and the closest was 4.871. Based on the output of the
Mahalanobis distance calculations there are 5 data are considered outliers whose value is above 16.27 removed so that the
number of observations from 231 to 226 samples.
Goodness-of-fit measures conformance input observation or actual (covariance matrix or correlation) with the
predictions of the model proposed. Chi-square value obtained from the analysis of the empirical research model is
equal to 6.058 with a probability level of 0.109. Value table for _
2
with df = 3 and o = 0.05 is 7.82. Thus the chi-square
value of the research is smaller than the table value of chi-square and probability value larger study of o 0.05, which means
the model proposed are no significant difference with the observational data or a very good fit. Value of GFI, AGFI, TLI
and RMSEA in Table 2 shows criteria value is goodness of fit, therefore empirical research model is very feasible to test
the hypotheses that follow.
The result of hypothesis testing using path analysis in Table 3 provides three main results. First, directly influence the
structure and mechanism of corporate governance in the aspects of ownership concentration (OC) and the intensity role of
board (IRB) on firm value (Q) is not proved significant (H1a and H3a not proved). Structure and mechanism of corporate
governance in the aspect of ownership concentration (OC) and the intensity role of board (IRB) had a positive impact on
the effectiveness of investments with social commitments (EISC) (H1b and H3b). EISC proved as mediating the
relationship of structure and corporate governance mechanisms in the aspect of ownership concentration (OC) and the
intensity role of board (IRB) on the firm value (H1c and H3C). The test results provide empirical evidence that the
effectiveness investment with social commitment to address the disparities between the results of empirical studies of
corporate governance and firm value. Effectiveness Investment with social commitment to be a measure of the corporate
performance that are able to create corporate value by taking into account the interests of shareholders and stakeholders in
a balanced way. The results of this study support Waddock and Graves (1997), Orlitzky et al. (2003) and Wissink (2011)
about links between corporate financial performance and corporate social performance. The results of this study support
the concept of enlightened value maximization of the firm (Jensen, 2001)
151
and contribute to the development of theory in this case is the synthesis of agency and stakeholder theory to
accommodate the dynamics of the business environment.
Second, Effectiveness investments with social commitments (EISC) positive impact on corporate financial reputation
(CR) that will increase firm value (Q), but the effect of Effectiveness investments with social commitments on firm value
directly more dominant than through reputation (H4, H5, H6 and H7). The test results provide empirical evidence that
the effectiveness investment with social commitment is a good quality signal so that positive impact on the reputation and
firm value. The results support the research Gray et al. (1988) and Toms (2002). This empirical evidence implies that the
effectiveness of investments with social commitments can be applied as a corporate strategy of competitive advantage
(Hart, 1995; Chauvin and Hirschey, 1994; Fombrun, 1996).
Third, effect of managerial ownership (MO) on the firm value directly is more dominant than the indirect effect through
investment effectiveness with social commitment in a negative direction (H2a proved; H2b and H2C not proved). The test
results indicate that a small proportion of managerial ownership impact on increasing the value of thecompany so that there
is alignment of interests between shareholders and agents (convergence of interest hypothesis) in line with Jensen and
Meckling (1976) and Jensen (1993). But in a high proportion of share ownership will give the agency the power to
entrench in the company (entrenchment hypothesis). This is consistent with Stulz (1988). The results do not support
Iturriaga and Sanz (2001), the absence of a non-monotonic relationship between managerial ownership and firm value
and investment decisions can not serve as a transition mechanism between managerial ownership and firm value.
Table 4 shows that there are 9 (nine) indirect effect relationship between variables or paths existing in the empirical
research model. The most dominant path is influence of the intensity role of the board on firm value through
effectiveness of investment with social commitment and corporate reputation. This suggests that the intensity role of
board that have proactive and objective natures will contribute to the achievement of the effectiveness investment with
social commitment to providing a positive impact on the corporate financial reputation and eventually creates firm value.
5. Conclusion
This study proves that the corporate governance structures and mechanisms - from the aspect of ownership
concentration and intensity of the role of board - have a positive and significant impact on the achievement of
effectiveness of investments with social commitment that will enhance the company's reputation and eventually have an
impact on the value creation of the company listed in Indonesia Stock Exchange. Effectiveness of investments with social
commitment is a managerial strategic outcome is influenced structure and corporate governance mechanisms with the
new paradigm of complexity and dynamics due to the pressure of external environment. The finding of this study is the
effectiveness of investments with social commitment mediates the effect of corporate governance structures and
mechanisms of the aspects of ownership concentration and the intensity of the role of board to the reputation and value of
the company. The next finding is the intensity role of board as a corporate governance mechanism is more effective in
contributing to an increase firm value in comparison to the power of concentration ownership as a corporate governance
structure.
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Notes:
Table 1. Descriptive Statistic
Variables N Range Minimum Maximum Mean Std. Deviation
OC 226 0,93 0,01 0,94 0,3079 0,229
MO 226 51,999 0,00001 52,00 3,7401 6,54047
IRB 226 24,99 0,66 25,65 4,5592 3,48559
EISC 226 0,64593 0,00015 0,646 0,145 0,119
CR 226 99,50 (56,00) 43,50 6,262 12,478
Q 226 4,797 0,461 5,258 1,529 0,868
157
Table 2. Goodness of fit Empirical Research Model
Goodness of fit Index
Absolute Measures:
_
2
- Chi-Square (df=3)
Probability
CMN/DF
RMSEA
GFI
Incremental Fit Measure:
AGFI
TLI
CFI
NFI
Table 3. Estimation Regression
Cut-off Value
Low expected
> 0,05
s 2,00 s
0,08 >
0,90
> 0,90
> 0,90 >
0,95 >
0,90
Result
6,058
0,109
2,019
0,067
0,991
0,939
0,901
0,980
0,964
Evaluation
Good
Good
Good
Good
Good
Good
Good
Good
Good
Variables Standardized Critical Ratio Probability Sign
relation coefficient
OC Q 0,023 0,365 0,715 +
MO Q (0,248) (3,896) 0,000 -
IR B Q (0,080) (1,238) 0,216 -
EISC Q 0,134 1,968 0,049
+CR Q 0,336 5,654
0,000 +OC EI SC 0,245
4,032 0,000 +MO EISC
(0,141) (2,259) 0,024 -
IRB EI SC 0,308 5,087 0,000 +
EISC CR 0,166 2,521 0,012 +
Table 4. Indirrect effect path
Indirect Effect Path Independent Variables
OC MO I RB EISC
Independent variable EISC Q 0,033 (0,019) 0,041 -
Independent variable EISC RKP 0,041 (0,023) 0,051 -
Independent variable EI SC CR Q 0,046 (0,027) 0,058 -
EISC CR Q - - - 0,056
158
Figure 1. State of the art of Effectiveness of investments with social commitment
Effectiveness investment
Ownership
concentration (OC)
with social commitment
(EISC)
H1b;H1c
H2b;H2c
H6;H7
H5
Corporate
Reputation
(CR)
Managerial
ownership (MO)
Intensity Role of
Boards (IRB)
H3b;H3c
H1a
H2a
H3a
H4
Firm Value
(Q)
Figure 2. Empirical Research Model
159
doc_225767088.docx
Case Study of Effectiveness Investments with Social Commitment towards Corporate Value Creation: In the Context of Structure and Mechanism Corporate Governance:- Governance is the act of governing. It relates to decisions that define expectations, grant power, or verify performance. It consists of either a separate process or part of decision-making or leadership processes. In modern nation-states, these processes and systems are typically administered by a government.
Case Study of Effectiveness Investments with Social
Commitment towards Corporate Value Creation: In the
Context of Structure and Mechanism Corporate
Governance
Abstract
The objective of this paper was to investigate the association between the structure and mechanism of corporate
governance and firm value mediated by the effectiveness of investments with social commitment that derived from
synthesis of Agency and Stakeholder theories. The study was conducted to all corporations in the Indonesian Stock
Exchange during 2009 - 2011. This study was expected to provide new insights on the synergistic effects of investment
discretion that synchronizes between economic and social orientation as suggested in the finance literature, an area had not
been examined in the prior studies. The result of this study can resolve the existing conflict in the literatures.
Effectiveness investments with social commitment mediate the relationship between structures and mechanisms of
corporate governance in the aspect of ownership concentration and the intensity role of the board toward firm value. The
finding of this research, the most dominant path was effect of the intensity role of the board on firm value through
effectiveness of investment with social commitment and corporate reputation. This suggests that the mechanism of
corporate governance was more effective than the structure of corporate governance toward firm value.
Keywords: Effectiveness of investment with social commitment; corporate governance; ownership concentration;
managerial ownership; intensity role of board; reputation; firm value.
1. Introduction
The study Berle and Means (1932) explicitly states about the necessity for separation between ownership and
management of the company, so that the distribution of shares in the company becomes an important issue. At the time of
the corporate management no longer do by the principal but handed over to the agent, then potential conflict in the
relationship between owners and managers, which is often referred as the agency problem (Jensen and Meckling, 1976).
In terms of ownership, there are two issues of agency, which the agency problem between majority shareholders and
minority shareholders (Shleifer and Vishny, 1997), and agency problems between management and shareholders (Jensen
and Meckling, 1976). Agency conflicts as mentioned above by Shleifer and Vishny (1997) can be resolved in one way is
through good corporate governance.
The literature on corporate governance structures and mechanisms identified three important corporate governance is
the board of directors, disclosure and ownership structure. However, based on empirical research there is no unanimity
among researchers about the impact of the structure and mechanism of corporate governance on corporate performance.
According to Gill et al. (2009), temporary literature suggests the findings agreed on the positive relationship between
disclosure and corporate performance, but the relationship between the board of directors and ownership structure on
corporate performance shows mixed results.
Implementation of good corporate governance as an instrument to mitigate conflicts of interest in the public companies
in Indonesia has not been fully working optimally. The fact was supported by the results of a survey of national
institutions and international level about the implementation of good corporate governance (GCG) in Indonesia which
global investors' perceptions about the management of the corporation in Indonesia was still weak (Daniri, 2006); the
results of the World Bank and McKinsey survey shows that investors have a preference for avoiding corporate enterprise
with poor corporate governance (McKinsey and Co, 2002).
145
The next phenomenon is the increase in the complexity and dynamics of the business environment at the moment
encouraged companies to think about sustainability in a corporate goal orientation. According Elkington (1997),
sustainability is a balance between people, planet, and profit, which is known as the concept of the Triple Bottom Line
(TBL). Frame of mind and the concept of sustainability were lies at the interface between the three aspects, people-
social, planet-environmental, and profit- economic. Companies should be responsible for the positive and negative impact
caused to the economic, social and environmental. Sustainability is the end goal to be achieved by all companies. The
ultimate goal of which is to balance between economic performance, social welfare, and the rejuvenation and
preservation of the environment. Process of achieve the ultimate goal is referred to as sustainable development and to
achieve the ultimate goal, it takes a vehicle in contributing to sustainability is called Corporate Social Responsibility
(Panapanaan et al., 2003). Activity of Corporate Social Responsibility is an integral part of good corporate governance.
Oriented social responsibility to stakeholders, which is in line with one of the main principles of Good Corporate
Governance that is responsibility. At this time there has been a paradigm shift in Good Corporate Governance is to extend
the theoretical paradigm of agency theory to the stakeholder theory perspective. The consequences of the paradigm shift
of Good Corporate Governance should pay attention to issues of corporate social responsibility.
Theoretical models developed in this study proposes a concept that can contribute to addressing gaps or
inconsistencies in the results of empirical research on the effect of corporate governance on firm value and
accommodate business phenomena associated with the implementation of corporate governance of public companies in
Indonesia. The concept is a derivation from synthesis agency and stakeholder theory that leads to the achievement of
corporate policy of sustainable performance through investment strategies oriented in domains that are morefriendly to
stakeholders called effectiveness investment with social commitment. Discretion of investment based on asset effectively
with economic and social orientation committed equally and simultaneously predictable impact on the reputation and
increasing corporate value. The objectives of this research are: (1) Developing theoretical models in an attempt to resolve
the conceptual and empirical controversy about the influence of corporate governance structures and mechanisms from the
aspect of ownership structure and board of directors on firm value of listed companies in Indonesia; (2) Synthesize and
test empirically the effectiveness investments with social commitment as a mediating influence corporate governance
structure and mechanism from the aspects of ownership structure and board of directors on firm value.
2. Effectiveness of Investments with Social Commitment
2.1 State of the art
Synthesis of agency and stakeholder theory related to the expansion of the company's goal maximizing value of firm.
According agency theory, firm objective is to maximizing firm value for benefit of shareholders. But on the other hand, a
firm can not maximize value if it ignores the interests of stakeholders. Jensen (2001) gives a solution to the conflict
between maximizing firm value for shareholder benefit and stakeholder theory with fusion joi nt between the enlightened
value maximization and enlightened stakeholder theory.
In the long term, the goals of social and economic are not inherently in conflict with each other but are integrally
connected. Achievement of these objectives is described through the linkage of corporate social performance (CSP) and
corporate financial performance (CFP) which is a combination of social and economic benefits. CSP and CFP is not a
concept that trade off each other and even both are concepts which have a positive relationship and complementary.
Both of them are a concept of alignment of interests between shareholders and stakeholders. This concept is supported
Orlitzky et al. (2003) which uses the principles of agency theory to build a positive relationship of CSP to CFP. In his
article mentioned that building relationships with stakeholders serves as a monitoring and enforcement mechanism that
prevents managers to forget the purpose of the broader financial organizations. Negotiation process and the explicit and
implicit contracts with stakeholders based on mutual relations and bilateral, preventing managers from diverting attention
to organization-wide financial objectives (Hill and Jones, 1992, Jones 1995).
In addition, by addressing and balancing the claims of various stakeholders (Freeman and Evan, 1990), managers can
improve the efficiency of their organizational adaptation to external demands. These methods will lead to lower agency
costs resulting in a positive relationship between CSP and CFP. State of the art proposition Investment Effectiveness
with Social commitments can be illustrated by the diagram of Figure 1.
146
2.2 Proposition
Based on the theoretical study of the synthesis between the Agency and Stakeholder theory, substantial theoretical and
empirical research above it can be derived that a proposition Effectiveness Investment with Social commitments.
Effectiveness Investments with Social commitment is an investment based asset that synchronizes economic motives and
commitment to social orientation. Investment based on assets with economic orientation was measured using corporate
financial performance (CFP) and investment with social commitment was measured with corporate social performance
(CSP) (Elkington, 1997; Fauzi et al., 2011). CFP and CSP synchronization is based on virtous cyrcle which stated that
there is no trade-off between CSP and CFP (Preston and O'Banon, 1997; Waddock and Graves, 1997;
Orlitzky et al., 2003; Wissink, 2011)
Effectiveness investments with social commitment is a strategy for optimizing the use of assets of the company which
has the objective to maintain business sustainability by shifting its focus from the maximization of profit (shareholder
oriented) to maximize value creation for all stakeholders (stakeholders and shareholders oriented). Effectiveness
investments with social commitment are corporate strategic outcomes as the impact of structures and mechanisms of
corporate governance in the context of the ownership structure and the role of the board of directors. Extend and intensity
of the role of the board of directors in the mechanisms of corporate governance is an important factor to encourage
executives to achieve the effectiveness of investments with social commitment (Hung, 2011). Effectiveness of investment
with social commitment has a positive impact on corporate reputation and corporate value creation. Effectiveness of
investments with social commitment is a mediating factor of the relationship between the structure and mechanism of
corporate governance on firm value creation. Based on the description above, it can be formulated in the following
proposition statement.
Proposition:
Effectiveness investment with social commitment is an investment based on asset that synchronizes economic
orientation and commitment to social orientation. Effectiveness Investment with Social commitment will have a
positive impact on the reputation and firm value. Effectiveness Investment with Social commitment mediate the
effect of structure and mechanisms of corporate governance in aspects of ownership structure and board of
directors toward corporate value creation.
Effectiveness of investments with social commitment was measured with a combined (jointly) between company
financial performance and corporate social performance. The use of these measures is based on the assumption that
combining the two measures provides a synergistic effect. Corporate financial performance is measured by using Asset
Turnover Ratio proxy. Corporate social performance is measured by the index of corporate social responsibility
disclosure. Empirical basis of measure selection can be described as follows:
1) Investment based on asset with economic orientation used Asset Turnover Ratio as proxy (Kallapur dan Trombley,
1999; Gaver and Gaver, 1993; Skinner, 1993; Florackis dan Ozkan, 2009). Asset turnover ratio is defined as the ratio
of total sales to total assets. This ratio is used in the context of the agency by Ang, et al. (2000) and Danielson and
Scott (2007) to construct an index of agency costs. The assumptions used are agency costs reflect the degree of
separation between ownership and control. Approach using two alternative measures agency cost. Proxy is also
adopted by Singh and Davidson (2004); Fleming, et al. (2005); and Porras and Mateo (2011). This proxy interpreted
by asset utilization ratio which shows how management effectively deploys asset. A higher asset turnover ratio shows
a good investment decision or may create a high return. This suggests that corporate governance mechanisms to
reduce conflicts between managers and shareholders may be significant (Florackis and Ozkan, 2009).
2) CSR Disclosure Index. Socially responsible investment is CSR performance using proxy CSR Disclosure Index.
CSR reporting, or social disclosure, is a strategic plan by the company to demonstrate a company's social
performance to stakeholders (Roberts, 1992), in other words, to understand CSR reporting as part of the dialogue
between the company and the stakeholders (Gray et al., 1995). Therefore, stakeholder theory provides a useful
framework for evaluating CSR activities through social reporting (Snider et al., 2003). CSR disclosure is a form of
corporate social responsibility towards stakeholders. Corporate social accountability in the report submitted with the
form of mechanisms that companies report to the parties concerned in the form of financial statements, annual reports
and other types of reports. The report is the form of the provision of financial and non-financial organizations with
respect to the interaction with the physical and social environment, as stated in the annual
147
report or a separate social report (Hackston dan Milne, 1996). Corporate social disclosures include details of the
physical environment, energy, human resources, products and community involvement matters. To find out the
extent of social disclosure level is determined by how many items of the type of social disclosure in reports through
content analysis procedures (Krippendoff, 2004 and Neuendrof, 2011).
2.3 Hypothesis Development
2.3.1 Ownership Concentration and Managerial Ownership as the Corporate Governance Structure and its influence
on Effectiveness Investment with Social commitment and Corporate Value
The presence of concentrations of ownership characterized by dominant shareholders control corporate behavior
affects the organization's goals and how the control is done in the company (Thomsen dan Pedersen, 2000). High
percentage of shares held by shareholders makes it possible to conduct important transactions without the other
shareholders can intervention (Destefanis dan Sena, 2007). Anderson et al. (2003) argues that the dominant shareholder
different from the other shareholders in the two aspects: (a) interests of long-term corporate survival; (b) the importance
of maintaining their own reputation is strongly associated with the company. This suggests that the dominant
shareholders, compared with other types of owners, will be more likely to adopt decisions that maximize the firm's
behavior economic, social and environmental. Other empirical studies support (Syriopoulos et al., 2007; Andres,
2008; Dinga dan Stratling, 2009; Mandaci dan Gumus, 2010; Salami, 2011), it can be formulated hypothesis:
H1a: Ownership concentration has a positive effect on firm value.
H1b: Ownership concentration has a positive effect on Effectiveness investment with Social commitment.
H 1 c: Effect of Ownership Concentration on Firm Value mediated by Effectiveness Investment with Social
commitments.
Theoretically, there are two main hypotheses about the impact of managerial ownership on firm value. Convergence of
interest hypothesis linking the role of managerial ownership and corporate performance (Jensen and Meckling, 1976;
Jensen, 1993), propose that the shareholding managers will assist in aligning the interests of shareholders and managers.
Entrenchment hypothesis proposed by Stulz (1988) explained that the higher managerial ownership will cause a decrease
in the value of the company. Managers who have a large number of shares that will likely entrenched in his position. As a
result, the investment decision is non-value maximizing that firm value will decrease (Chen et al., 2003; Lundstrum, 2009;
Mandaci and Gumus, 2010).
The result of relationship between managerial ownership and firm value is still conflicting shows two main directions
(Iturriaga dan Sanz, 2001). First, several studies have detected a non-monotonic relationship between managerial
ownership and firm value (Morck et al.,1988; McConnel and Servaes, 1990; Cho, 1998). This led to doubts about the
allegations an alignment of interest resulting from the presence of managerial ownership. Second, as it says Jensen and
Meckling (1976), that investment decisions can serve as a transition mechanism between managerial ownership with firm
values. Results of research Iturriaga and Sanz (2001) shows the reciprocal relationship between firm value, investment
and managerial ownership. Chan Du dan Jia Wu (2011) suggests that CEO stock option holders significant positive effect
on investment decisions for all model specifications.
Empirical evidence which explains relation between among insider ownership and corporate CSR is not widely studied
and researched in the empirical literature. Managerial ownership is a major source of executive power (Finkelstein, 1992),
and research shows that executives see themselves as mediators of conflicting claims about the organization. Insider
Ownership associated with the powers that be, allowing the ability of the executive to allocate resources among diverse
stakeholders in a manner that ensures continued contribution to stakeholders and extended the company's
prosperity. Based on theoretical and empirical research studies mentioned above, the hypothesis is formulated:
H2a: Managerial ownership has a negative effect on firm value.
H2b: Managerial ownership positively associated with the effectiveness of investments with social
commitment.
H2c: Effect of Managerial Ownership on Firm Value mediated by Effectiveness Investment with Social
commitments.
148
2.3.2 Intensity Role of Board of Directors as Corporate Governance Mechanism and its influence on Effectiveness
Investment with Social commitment and Firm Value
This study using the intensity role of the Board is an approach that needed board to run it functions and its role in
corporate governance mechanisms. Intensity role of board is a combined process that using proxy frequency of board
meetings, among board, with committees and directors (Zahra dan Peace, 1989) and attribute composition using proxy
independence of the board (Setia-Atmaja, 2009; Shan and McIver, 2011).
The Board directors of the company do an important role and thus considered to be an important mechanism Corporate
Governance (Lipton and Lorsch, 1992; Jensen, 1993). Role of the board is to provide advice (expert advice), monitoring
and find accountability (discipline) management to ensure that the managers give priority to the interests of shareholders
(Jensen and Meckling, 1976; Ntim, 2009). Important proxy for measuring the intensity and effectiveness of monitoring
and discipline is the frequency of corporate board meetings (Jensen, 1993; Vafeas, 1999). The theoretical proposition is
that the frequency of board meetings to measure the intensity of the board's activities, and the quality or effectiveness of
monitoring (Vafeas, 1999; Conger et al., 1998; Ntim dan Osei, 2011). Higher frequency of board meetings can produce a
higher quality of managerial monitoring, and thus have a positive impact on the financial performance of the company
(Vafeas, 1999, Ntim, 2009). Regular meetings allow directors more time to negotiate, strategize, and to assess managerial
performance (Vafeas, 1999).
Another proxy used to measure the intensity of the role of board is the independence of the board. Fama dan Jensen
(1983) describes the role of corporate governance mechanisms in controlling agency conflicts. They identified board as
one of the most important of the control of the organization, and highlight the importance of the independence of board in
relation to the ratification and monitoring of management decisions. Specifically emphasized that the board has the power
employ, dismiss, and compensation for top managers and to ratify and monitoring important decisions.
Role in implementing functions of an independent board monitoring and advising as well as the approval of the
company's strategic decisions especially with regard to social interest based on resource dependency theory. Resource
dependence theory suggests that the election of board members outside can be seen as a strategic decision to address the
organization's relationship with its business environment (Pfeffer and Salancik, 1978). In efforts to maintain a positive
relationship with the environment is composed of various stakeholders, outside directors can help companies respond
appropriately to external constituents through comply with environmental standards and participate in various activities
oriented stakeholder (Pfeffer, 1973; Abdur Rouf, 2011; Harjoto and Jo, 2011). Based on theoretical studies and an
overview of some empirical studies on the effect of the frequency of board meetings and board independence
on firm value can be formulated hypothesis:
H3a: Board of Directors with the high intensity of the role of board has a positive effect on firm value.
H3b: Intensity role of board has a positive effect on the effectiveness of investments with social commitment.
H3c: Effect of Intensity role of Board on Firm Value mediated by Effectiveness Investment with Social
commitments.
2.3.3 Association of Effectiveness Investment with Social commitment to Corporate Value and mediation Corporate
Reputation
Resource-based view of the firm provides the appropriate basis for examining how companies create social and
environmental reputation (Hart, 1995; Litz, 1996; Porter & Van Der Linde, 1996; Russo & Fouts, 1997, Waddock &
Graves, 1997). The most important reputation comes from intangible assets. Its interpretation is consistent with the
resource-based view explain the competitive advantage in quality can not be duplicated, including those packaged in
reputation. Recently has been applied specifically to environmental management and competitive advantage. Physical
resources can be easily obtained by competitors (Barney, 1991), while the asset-based social complex can not be imitated
(Hart, 1995). Reputation-based intangible assets become more important contributor to the performance of the company
and the resources are more likely to be valuable and can not be replicated when people demand a cleaner environment
(Russo & Fouts, 1997). Empirical research shows that improving the company's reputation and eventually creates goodwill
has a positive effect on the market value (Chauvin & Hirschey, 1994; Fombrun, 1996).
Accounting disclosure incorporated with signaling hypothesis formed important relationships among perspectives of
resources and corporate governance. Signaling theory remains important because it has the potential of combining
together separate strands of empirical findings on disclosure (Spicer, 1978; Jaggi & Freedman, 1992) and resource-
149
based perspective and governance outlined previously. Toms (2002) offering a theoretical extension of the resource-
based view of the firm to include quality signaling through channel of accounting disclosure. The results showed that the
implementation, monitoring and disclosure of environmental policies and disclosures in the annual report contributed
significantly to the creation of environmental reputation. According Gray et al. (1995), corporate managers disclose social
information in the context to improve the company's image, although he had to sacrifice resources for the event. The
company's image will improve investor confidence in the company so that the value of the company increases. Based on a
review of theoretical and empirical research overview the following hypothesis can be developed:
H4:
H5:
H6:
H7:
Corporate Finance reputation positive effect on Firm Value.
Effectiveness Investment with Social commitment has a positive effect on Corporate Financial
Reputation.
Effectiveness Investment with Social commitment has a positive effect on Firm Value
Effect Effectiveness investment with social commitment to the firm value mediated by corporate
financial reputation.
Based on the hypothesis statements 1 through 7 above can then be arranged in an empirical research model in Figure 2.
3. Research Methods
Object of this research is all the companies listed on the Indonesia Stock Exchange with managerial ownership and
implementing corporate social responsibility activities in years 2009-2011. Sources of data obtained from: (1)
Indonesian Capital Market Directory (ICMD); (2) Corporate Annual report; (3) JSX Monthly Statistics for the January
2009 through December 2011. The data used is panel data with purposive sampling technique. The object of research that
match with criteria as much as 231 observations.
Survey methods used to collect data about the structure and mechanism of corporate governance and social performance.
Social disclosure form of words, numbers, pictures, graphs, and tables and word that show or indicate corporate social
responsibility are disclosed in annual report of the company through content analysis. Social disclosure consists of: (a)
Environment; (b) Energy; (c) Social community involvement and development; (d) Human resources; (e) Product and
customers; (f) Another factor are corporate governance, commitment to CSR and external rewards to company
performance.
Corporate governance structure are measured by the concentration ownership - OC (Lee and O'Neil, 2003; Setia- Atmaja,
2009; Dinga, 2009), and Managerial Ownership - MO (Morck et al., 1988; Bhagat and Black, 2002; Florackis, 2005;
Bhagat and Bolton, 2007; Mura, 2007; Florackis and Ozkan, 2009). Corporate governance mechanism is measured by
the intensity role of board (IRB). Intensity role of board using combined proxy among the frequency of board meetings
(Vafeas, 1999; Conger et al., 1998; Ntim, 2009; Ntim and Osei, 2011) and independence board (Muth and Donaldson,
1998; Hermalin and Weisbach, 2003; Xie et al., 2003; Prasanna, 2006; Tang, 2007; Garg, 2007; Pathan et al., 2007; Javed
and Iqbal, 2007; Samad et al., 2008; Setia-Atmaja, 2009). Effectiveness Investments with Social Commitments (EISC)
measured by multiplying Asset Turnover Ratio (Ang et al., 2000; Singh and Davidson, 2004; Fleming et al., 2005) with
CSR Disclosure Index (Krippendoff, 2004 dan Neuendrof, 2011).
i
EISC=
TS
x
TA
¿ PS
¿ PS
n
(1)
Where, EISC is Effectiveness Investments with Social Commitments; TS is Total Sales; TA is Total Asset; PS
i
is Real
corporate social disclosure; PS
n
is Real social disclosure across the enterprise.
Corporate financial reputation (CR) is measured by the difference in the current year stock price with the previous year
(Neda Vitezic, 2011; Dunbar and Schwalbach, 2000; Roberts and Dowling, 2002; Rose andThomsen, 2004; Neville et al.,
2005; Inglis et al., 2006; Sanchez and Sotorrio, 2007; Zhang and Rezaee, 2009). Corporate financial reputation is
calculated by the following formula.
CR = P
t
÷ P
t
÷1 (2)
Where, CR is Corporate financial reputation; P
t
is closing price in years t; and P
t-1
is closing price in years t-1.
Proxy firm value is Tobin's Q (Copeland et al., 2000; Lidenberg and Ross, 1981). Some researchers are using Tobin's
Q as a proxy for firm value: Demsetz and Villalonga (2001); Brown and Caylor, 2004; Bebchuk et al. (2009); Bhagat and
Bolton (2007); Amman et al. (2010); Bos et al. (2011). Tobin's Q model is calculated using the following formula:
150
Q
=
(EMV +D)
(EBV+D)
(3 )
Where, Q is Firm Value; EMV is Equity Market Value; D is Book value of Debt and EBV is Equity Book Value.
Data were analyzed using path analysis approach with program AMOS 16.0. Based on empirical research model path
diagram, it can be arranged three standardized structural equation, as follows:
EISC = |
11
OC + |
12
MO + |
13
IRB + c
1
(4)
CR = |
21
EISC + c
2
(5 )
Q = |
31
OC + |
32
MO + |
33
IRB + |
34
EISC + |
35
CR + c
3
(6 )
4. Result and Discuss
Table 1 shows the description of the company's observation illustrates that: (1) companies that are observed are mostly
corporate ownership concentration where the average concentration of ownership of 30.79%; (2) managerial ownership
varies widely, the minimum amount of 0.0001%, maximum 52% and average managerial ownership 3.7%; (3) proportion
of independent board average of 43.76% means fulfilling minimum requirement of 30% and an average board meeting is
10 times. The intensity of the role of board on average 4.56 means that the role of board is quite intense.; (4) Value of
Tobin's q has an average of 1.529 shows the average firm observations have value good company; (5) EISC value quite
varied with a minimum value of 0.00015, maximum value 0.656 and average value of 0.145 indicates EISC observations
company perform an investment policy with economic and social motives simultaneously, even though with a
disproportionate weight; (6) reputation with an average of 6.262 indicates that observed firms on average have a positive
reputation.
Testing of model assumptions empirical research has been conducted with the result that the empirical research model
assumptions fulfilled. Multivariate normality of the data can be tolerated and there were no multicollinearity. Evaluation
performed multivariate outliers using the mahalonobis distance calculations are based on the value of the chi-square
distribution table _
2
on the degree of freedom for the number of variables used in the study. This research using 3 variables at level p <
0,001 is _
2
(3;0.001) = 16.27. The data has a Mahalanobis distance greater than 16.27 is considered multivariate outliers. Mahalanobis
distance calculation from the most distant data is 98.269 and the closest was 4.871. Based on the output of the
Mahalanobis distance calculations there are 5 data are considered outliers whose value is above 16.27 removed so that the
number of observations from 231 to 226 samples.
Goodness-of-fit measures conformance input observation or actual (covariance matrix or correlation) with the
predictions of the model proposed. Chi-square value obtained from the analysis of the empirical research model is
equal to 6.058 with a probability level of 0.109. Value table for _
2
with df = 3 and o = 0.05 is 7.82. Thus the chi-square
value of the research is smaller than the table value of chi-square and probability value larger study of o 0.05, which means
the model proposed are no significant difference with the observational data or a very good fit. Value of GFI, AGFI, TLI
and RMSEA in Table 2 shows criteria value is goodness of fit, therefore empirical research model is very feasible to test
the hypotheses that follow.
The result of hypothesis testing using path analysis in Table 3 provides three main results. First, directly influence the
structure and mechanism of corporate governance in the aspects of ownership concentration (OC) and the intensity role of
board (IRB) on firm value (Q) is not proved significant (H1a and H3a not proved). Structure and mechanism of corporate
governance in the aspect of ownership concentration (OC) and the intensity role of board (IRB) had a positive impact on
the effectiveness of investments with social commitments (EISC) (H1b and H3b). EISC proved as mediating the
relationship of structure and corporate governance mechanisms in the aspect of ownership concentration (OC) and the
intensity role of board (IRB) on the firm value (H1c and H3C). The test results provide empirical evidence that the
effectiveness investment with social commitment to address the disparities between the results of empirical studies of
corporate governance and firm value. Effectiveness Investment with social commitment to be a measure of the corporate
performance that are able to create corporate value by taking into account the interests of shareholders and stakeholders in
a balanced way. The results of this study support Waddock and Graves (1997), Orlitzky et al. (2003) and Wissink (2011)
about links between corporate financial performance and corporate social performance. The results of this study support
the concept of enlightened value maximization of the firm (Jensen, 2001)
151
and contribute to the development of theory in this case is the synthesis of agency and stakeholder theory to
accommodate the dynamics of the business environment.
Second, Effectiveness investments with social commitments (EISC) positive impact on corporate financial reputation
(CR) that will increase firm value (Q), but the effect of Effectiveness investments with social commitments on firm value
directly more dominant than through reputation (H4, H5, H6 and H7). The test results provide empirical evidence that
the effectiveness investment with social commitment is a good quality signal so that positive impact on the reputation and
firm value. The results support the research Gray et al. (1988) and Toms (2002). This empirical evidence implies that the
effectiveness of investments with social commitments can be applied as a corporate strategy of competitive advantage
(Hart, 1995; Chauvin and Hirschey, 1994; Fombrun, 1996).
Third, effect of managerial ownership (MO) on the firm value directly is more dominant than the indirect effect through
investment effectiveness with social commitment in a negative direction (H2a proved; H2b and H2C not proved). The test
results indicate that a small proportion of managerial ownership impact on increasing the value of thecompany so that there
is alignment of interests between shareholders and agents (convergence of interest hypothesis) in line with Jensen and
Meckling (1976) and Jensen (1993). But in a high proportion of share ownership will give the agency the power to
entrench in the company (entrenchment hypothesis). This is consistent with Stulz (1988). The results do not support
Iturriaga and Sanz (2001), the absence of a non-monotonic relationship between managerial ownership and firm value
and investment decisions can not serve as a transition mechanism between managerial ownership and firm value.
Table 4 shows that there are 9 (nine) indirect effect relationship between variables or paths existing in the empirical
research model. The most dominant path is influence of the intensity role of the board on firm value through
effectiveness of investment with social commitment and corporate reputation. This suggests that the intensity role of
board that have proactive and objective natures will contribute to the achievement of the effectiveness investment with
social commitment to providing a positive impact on the corporate financial reputation and eventually creates firm value.
5. Conclusion
This study proves that the corporate governance structures and mechanisms - from the aspect of ownership
concentration and intensity of the role of board - have a positive and significant impact on the achievement of
effectiveness of investments with social commitment that will enhance the company's reputation and eventually have an
impact on the value creation of the company listed in Indonesia Stock Exchange. Effectiveness of investments with social
commitment is a managerial strategic outcome is influenced structure and corporate governance mechanisms with the
new paradigm of complexity and dynamics due to the pressure of external environment. The finding of this study is the
effectiveness of investments with social commitment mediates the effect of corporate governance structures and
mechanisms of the aspects of ownership concentration and the intensity of the role of board to the reputation and value of
the company. The next finding is the intensity role of board as a corporate governance mechanism is more effective in
contributing to an increase firm value in comparison to the power of concentration ownership as a corporate governance
structure.
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Notes:
Table 1. Descriptive Statistic
Variables N Range Minimum Maximum Mean Std. Deviation
OC 226 0,93 0,01 0,94 0,3079 0,229
MO 226 51,999 0,00001 52,00 3,7401 6,54047
IRB 226 24,99 0,66 25,65 4,5592 3,48559
EISC 226 0,64593 0,00015 0,646 0,145 0,119
CR 226 99,50 (56,00) 43,50 6,262 12,478
Q 226 4,797 0,461 5,258 1,529 0,868
157
Table 2. Goodness of fit Empirical Research Model
Goodness of fit Index
Absolute Measures:
_
2
- Chi-Square (df=3)
Probability
CMN/DF
RMSEA
GFI
Incremental Fit Measure:
AGFI
TLI
CFI
NFI
Table 3. Estimation Regression
Cut-off Value
Low expected
> 0,05
s 2,00 s
0,08 >
0,90
> 0,90
> 0,90 >
0,95 >
0,90
Result
6,058
0,109
2,019
0,067
0,991
0,939
0,901
0,980
0,964
Evaluation
Good
Good
Good
Good
Good
Good
Good
Good
Good
Variables Standardized Critical Ratio Probability Sign
relation coefficient
OC Q 0,023 0,365 0,715 +
MO Q (0,248) (3,896) 0,000 -
IR B Q (0,080) (1,238) 0,216 -
EISC Q 0,134 1,968 0,049
+CR Q 0,336 5,654
0,000 +OC EI SC 0,245
4,032 0,000 +MO EISC
(0,141) (2,259) 0,024 -
IRB EI SC 0,308 5,087 0,000 +
EISC CR 0,166 2,521 0,012 +
Table 4. Indirrect effect path
Indirect Effect Path Independent Variables
OC MO I RB EISC
Independent variable EISC Q 0,033 (0,019) 0,041 -
Independent variable EISC RKP 0,041 (0,023) 0,051 -
Independent variable EI SC CR Q 0,046 (0,027) 0,058 -
EISC CR Q - - - 0,056
158
Figure 1. State of the art of Effectiveness of investments with social commitment
Effectiveness investment
Ownership
concentration (OC)
with social commitment
(EISC)
H1b;H1c
H2b;H2c
H6;H7
H5
Corporate
Reputation
(CR)
Managerial
ownership (MO)
Intensity Role of
Boards (IRB)
H3b;H3c
H1a
H2a
H3a
H4
Firm Value
(Q)
Figure 2. Empirical Research Model
159
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