Financial Crime World

High Corporate Governance Compliance Among Listed Companies in Indonesia

Introduction

This study examines the factors that contribute to high corporate governance (CG) compliance scores among listed companies in Indonesia. Using a unique dataset of 1,111 firm-year observations from 2003 to 2013, we explore the determinants of high CG practices as measured by the Governance Index (GOVINDEX).

Main Findings

Family-Controlled Firms vs. Nonfamily Firms

  • Family-Controlled Firms: Approximately 68% of low-compliance firms are family-controlled.
  • Nonfamily Firms: Positively impacted by financial shocks, which increase their likelihood of complying with CG codes.

Determinants of High GOVINDEX Scores

  • Firm Age and Size: Older, larger firms tend to have higher GOVINDEX scores.
  • Financial Performance: Better financial performance is positively associated with high GOVINDEX scores.
  • Free Float: Higher free float is also a positive predictor of high GOVINDEX scores.

Factors Influencing Compliance

  • Equity: More profitable and capitalized firms are more likely to comply with CG codes.
  • Family Director: Presence of family directors has a positive impact on compliance.
  • Financial Crisis: The financial crisis has a positive effect on firms’ compliance with Indonesian CG codes.

Negative Influencers

  • Blockholders: Blockholders have a detrimental impact on firm’s compliance with regulations.
  • Third Generation of Family Founders: Harms CG compliance among family-controlled firms.

Conclusion

The study highlights significant differences in key characteristics between family and nonfamily businesses. Family-controlled firms are more concerned with market values and compelled to follow governance codes to send a positive signal to outside investors. Conversely, third-family generation and blockholders may act as deterrents to family firms’ compliance with CG provisions.

Implications

The findings have implications for policymakers, regulators, and investors seeking to promote good governance practices among listed companies in emerging markets like Indonesia. The study provides insights into the factors that contribute to high CG compliance among listed companies in Indonesia, emphasizing the importance of equity values, financial performance, and family ownership in determining compliance with regulatory requirements.

Recommendations

Based on the findings, policymakers and regulators may consider:

  • Implementing measures to promote transparency and disclosure practices
  • Encouraging firms to adopt best governance practices
  • Developing programs to support nonfamily firms in improving their CG compliance

By understanding the determinants of high CG compliance among listed companies in Indonesia, we can work towards promoting good governance practices and ensuring a more sustainable future for businesses and investors alike.