Review Journal "Good Governance on Profitability"

Review Jurnal

EFFECTS OF THE IMPLEMENTATION OF GOOD CORPORATE GOVERNANCE ON PROFITABILITY

Research Background

The financial crisis that hit Asia, especially Indonesia in from 1997 to 1998 had a tremendous impact on the companies that dominate the business world in Indonesia. Many companies were liquidated because they could not survive. This can be observed from the fluctuations of exchange rate against foreign currencies, especially against the US dollar caused by the lack of management foundation in those companies. 

There were many companies that were liquidated and this caused the government to initiate restructuring action and recapitulation. Recapitulation and restructuring actions indicates the lack of those companies ability to survive. The poor performance and low competitive sense of Government or State-Owned Enterprises (BUMN) were also identified as the cause of the financial crisis that hit Indonesia. 

By the end of 2006, Indonesia’s economy life showed signs of improvement. The better economic conditions in Indonesia were marked by the decline in BI (Bank of Indonesia) interest rate which was below 10.75% (www.bi.go.id). It is expected that by the decreasing of BI rate, it will trigger a decline of bank credit rates, so that real sector will start to grow and move the Indonesian economy. The government also expected that public sectors of BUMN would grow and evidently would give a considerable effect on the improvement of Indonesia’s economy.

The Indonesian Institute for Corporate Governance (IICG) always conducts research about the proper application of corporate governance every year, especially in public companies in Indonesia’s Stock Exchange. Basically, Good Corporate Governance is the procedure of company management in running their goals that result in optimal profitability or profit for the investors.

Problem Identification 

Based on the above descriptions and explanations, there are some underlying issues that became the basis of this study:

1. What is the level of implementation of Good Corporate Governance in the studied

2. What is the performance of the company's profitability?

3. How does the level of GCG implementation affect the company’s profitability?

Methods Used 

The method used by researchers is correlational method and case study method. The steps  of testing begin from  the test of  variable operationalization,  population   and population target determintaion, data collection techniques, and research measurement scale.

Variable Operationalization 

Operational variables in this study can be seen in the following table.

Corporate Governance Perception Index 

In this study to measure the level of GCG  implementation , authors use the study result of The Indonesian Institute for Corporate Governance (IICG) .Meanwhile the assessment  aspects used  by IICG to measure GCG implementation cover 12 indicators : Commitment, Transparency, Accountability, Responsibility, Independence, Justice, competence, leadership, ability to cooperate, Vision, Mission and Values, morals and ethics, and Strategy.  

Collection Techniques and Data Sources 

A technique used in the data collection is documentation method which collects data about things or variables that are studied. The data used in this research is secondary data. The data used in this study is taken from the financial statements of each of the companies’ official website and historical data from IICG by downloading through www.iicg.org and also from SWA magazine.  

CONCLUSIONS AND RECOMMENDATIONS 

Conclusion 

Based on the study result and discussion, There are some conclusions as follows:

Level of Good Corporate Governance Implementation  

Good Corporate Governance is measured using CGPI in 9 surveyed- companies during the three-year period from 2008 to 2010. There are four companies experiencing an increase every year and 5 other companies experiencing fluctuation (ups and downs).  This situation indicates that in general, companies have already applied good corporate governance implementation. In 2010 there were four companies that fall into the category of highly reliable, and 6 companies in the category of reliable, no company was in the lower level category. Companies in Indonesia are aware that by implementing good corporate governance, the company’s performance will be better and ultimately increase their profitability, and it will attract national and international investors. 

Level of Profitability 

The level of profitability measured by ROA in 9 sampled companies during the period 20082010 shows there are four companies experiencing the increase every year, four companies experienced ups and downs and one company declined. . This situation indicates that some companies have a good ability to manage their assets to generate profits. The decrease in profitability is generally caused by the subprime mortgage global economy crisis  in 2009, but the impacts still exists  in 2010 and also due to the weakening of US dollar against Rupiah, as we know generally large companies always have assets in US  dollars, because the dollar is  more resistant to inflation. 

Effects of Good Corporate Governance Implementation on Profitability 

Based on the results of hypothesis testing, there is no effect of Good Corporate Governance implementation on profitability (return on assets) of the sampled companies.  

The effect is 19.8%. This happened because those companies understand the importance of good corporate governance and seriously implemented the GCG. The factors that cause a small influence of GCG implementation is only 19.8% during the three year research period, from 2008 to 2010. 

Suggestions 

Based on the results, the authors propose some suggestions that are expected to be useful for the parties it may concern: 

GCG is one of the factors that drive improved performance of a company, because of GCG implementation in a company, the level of public confidence, especially investors will increase. Therefore, a company should always improve the quality of GCG implementation. 

In order to achieve   maximum financial performance, a company has to improve the quality of GCG implementation, and should develop and implement the principles of GCG regularly to obtain a positive result. 

Source :
European Journal of Business and Innovation Research
Vol.3, No.4, pp.19-35, September 2015
Published by European Centre for Research Training and Development UK (www.eajournals.org)