African Journal of Business Management Vol.5 (9), pp. 3630-3634, 4 May 2011 Available online at http://www.academicjournals.org/ajbm DOI: 10.5897/AJBM11.419 ISSN 1993-8233 2011 Academic Journals Full Length Research Paper Investor s perception on corporate responsibility of Indonesian listed companies Martin Surya Mulyadi* and Yunita Anwar Accounting Department, Faculty of Economics and Business, BINUS University, Jakarta, Indonesia. Accepted 30 March 2011 Good corporate responsibility is one principle of Good Corporate Governance (GCG). There is growing concern of GCG implementation nowadays, especially in Indonesia. Implementation of GCG, which also included responsibility, will create corporate sustainability and could be measured with responsibility rating and corporate governance rating issued by National Committee of Governance Policy. Our study employs data panel model and shows that from ten Indonesian companies from January 2010 to January 2011, either responsibility rating or corporate governance rating had no significant impact on stock s return. It means that investors still do not take account of company s policy regarding responsibility and corporate governance as one of their consideration in making an investment decision. Key words: Corporate responsibility, good corporate governance, Indonesian listed companies, national committee of governance policy, data panel INTRODUCTION Good corporate responsibility from corporation is one principle of Good Corporate Governance (GCG). As we know, there is a growing concern nowadays regarding GCG practice, especially in Indonesia. In Indonesia, the National Committee of Governance Policy a committee responsible for GCG practice in Indonesia, point out five principles of GCG which includes: 1. Transparency 2. Accountability 3. Responsibility 4. Independency 5. Fairness. Good corporate disclosure, that we are going to discuss in this study is based on index issued by the National Committee of Governance Policy. They assess all listed companies in Indonesia, and made a scoring index regarding their responsibility. Although the concept of management s responsibility is toward stakeholder (not only shareholder) after the corporate and accountability reform (and also *Corresponding author. E-mail: martin.mycc@gmail.com or martin@binus.ac.id. implementation of Good Corporate Governance practice), we still use information from stock market in our research. Stock market is still one of the best source for corporation s financing needs and therefore would also change the policy of corporation, if they have new major shareholder. Following Fama s (1970) assumption of an efficient capital market, the price of the security is the best available and unbiased estimate of the firm s present value of discounted future cash flows. LITERATURE REVIEW Corporate governance and good corporate governance Corporate governance has been described by Sir Adrian Cadbury as the way organization are directed and controlled (Pickett, 2005). An organization s main task is to achieve the level of performance that it was established for. But at the same time, an organization must adhere to all relevant standards, rules, laws, regulations, policies and expectations that form a framework within which this performance must be assessed. Most scholars adopt the definition of corporate governance provided by OECD, which refers to the mechanism and process of
Mulyadi and Anwar 3631 of instructing, managing, and actualizing corporate managers, and protecting the interests of shareholders as well as other stakeholders by improving corporate performance. Shleifer and Vishny (1997) believe corporate governance involves how fund suppliers returns can be guaranteed and how they can ensure managers would not infringe their money nor invest it in ineffective plans for selfish reasons. Ye et al. (2002) proposed that, a welldesigned and implemented system not only helps improve the capacity of strategic management and supervise managers behaviors but also ensures the returns deserved by external investors and protects other stakeholders interests. Good corporate governance is one part of market economy system. It closely relates to trust, either to the corporation and also business condition in a country. Implementation of GCG will encourage fair competition and also good business condition. In Indonesia, the National Committee of Governance Policy has stated five principles of GCG which includes: Transparency: To keep objectivity in running a business, corporation have to provide timely and understandable material and relevant information for stakeholders. Corporation have to disclose important information, not just the information required to disclose by-regulations. Accountability: A corporation should be accountable of its performance. So, a corporation have to be wellmanaged, measurable and in accordance with corporation s objective and also consider the interests of shareholders and stakeholders. Responsibility: A corporation has to follow all regulations and also do the responsibility toward society and environment, therefore creating a sustainable business. Independency: To ensure implementation of GCG, corporations should be independently managed. There will be a dominant part in a corporation and no intervention from other parties. Fairness: Corporation have to view interest of shareholder and stakeholders fairly. There will be no discrimination between all corporation s stakeholder. Corporate governance and quality of financial disclosure Research evaluates the impact of corporate governance policies on the financial reporting environment which generates mixed evidence. Karamanou and Vafeas (2005) demonstrated that, corporations with more efficient boards and stronger audit committees led to issuance of more forecasts by management that were also more accurate. Contrary to these results, research by Koehn and Ueng (2005) documented that, firms with poor governance practices provided financial information, that was at least as good as firms with strong corporate governance. In addition, Farber (2005) found that firms previously cited for fraud had difficulty overcoming the stigma, even after improving their corporate governance practices. Specifically, they still faced issues with credibility as institutional holdings and the number of analysts following the company did not increase subsequent to governance improvements. Thus, it is not clear whether stronger corporate governance directives accomplish the desired goal of creating more transparent and reliable financial statement. Myring and Shortridge (2010) found mixed evidence on the relationship between corporate governance and the quality of financial disclosures. Governance scores (extracted from The Corporate Library) tend not to be related to analysts consensus or the accuracy of individual forecasts. Their results are consistent with finding from Koehn and Ueng, and Farber that suggested strong corporate governance policies may not result in improvements in the financial reporting environment. Corporate sustainability and financial performance/firm s value As there is growing concern of implementation of GCG (which in turn will create corporate sustainability, should the implementation is going well), it is worth asking: is corporate sustainability accounted as a role while measuring a firm s value? Previous studies relating to this topic are mostly focusing on a firm s Corporate Social Responsibilities (CSR) to its financial performance, but with inconsistent conclusions. While some studies found positive relationship between CSR and profitability (Mallin, et al., 1995; Sauer, 1997; Cummings, 2000), others found negative or insignificant effects (Wagner, 2002; Korhonen, 2003; Bauer et al., 2005; Wahba, 2008; Valor, et al., 2009). These studies mainly put the research objects on social responsible index or fund. Lo and Sheu (2010) also found that financial performance variable is a strong and consistent determinant of a firm s market value. Hypothesis After analyzing literature review and previous research, we formulate our hypothesis: Corporate responsibility does not matter to investors. RESEARCH METHODOLOGY Data used in this research are closing price from ten listed companies. The selection criteria is each score of responsibility (from one to five) represented by two companies. We do not separate if the corporation is a state owned enterprise or not. We also used Corporate Governance Rating and Indonesian Stock
3632 Afr. J. Bus. Manage. Table 1. Selected stocks. Ticker symbol Responsibility rating Corporate governance rating PTBA 4 7 BMRI 4 6 SMCB 3 6 ANTM 2 8 BUMI 2 7 BBNI 2 6 ASII 2 5 BBRI 2 4 INTP 1 6 BBCA 1 5 Source: The National committee of governance policy. Table 2. Result from Equation 2. Dependent variable: R? Method: Pooled least squares Included observations: 12 Cross-sections included: 10 Total pool (balanced) observations: 120 Variable Coefficient Std. Error t-statistic Prob. RR? 0.072515 0.278067 0.260781 0.7947 CGR? -0.076501 0.115767-0.660822 0.5100 JKSE? 1.157655 0.111025 10.42699 0.0000 R-squared 0.478676 Mean dependent var 0.952104 Adjusted R-squared 0.469765 S.D. dependent var 4.089088 S.E. of regression 2.977561 Akaike info criterion 5.044768 Sum squared resid 1037.307 Schwarz criterion 5.114456 Log likelihood -299.6861 F-statistic 53.71439 Durbin-Watson stat 1.769003 Prob(F-statistic) 0.000000 Source: Data processed used Eviews 5. Exchange Composite as risk factor in our econometric model, presented in Table 1 and Figures 1 to 3. We used monthly data from January 2010 to January 2011. For computing monthly return, we used the following formula: R t = 100 x ln (I t / I t-1) (1) where: R t = return at period t, I t = closing price at period t, I t-1 = closing price at period t-1. The econometric model we used in this study is data panel analysis. We used the following formula in our research: R i,t = 0 + 1 RR i,t + 2 CGR i,t + 3 JKSE i,t + e i,t (2) where: R i,t = return of all companies at period t, RR i,t = responsibility rating of all companies at period t, CGR i,t = corporate governance rating of all companies at period t, JKSE i,t = indonesian stock exchange composite at period t. ei,t = error term RESULTS AND DISCUSSION Test results from ten companies is shown subsequently. Stock s return become our dependent variable while responsibility rating, corporate governance rating, and composite index are independent variables. From the result in Table 2, we can see that responsibility rating and corporate governance rating have no significant impact toward stock s return. Meanwhile, composite index has significant index in 1% to stock s return and it is quite predictable. Result from our testing is in line with our
Mulyadi and Anwar 3633 Figure 1. Stock s performance (monthly return) I. Figure 2. Stock s performance (monthly return) II. Figure 3. Stock s performance (monthly return) II.
3634 Afr. J. Bus. Manage. proposed hypothesis, that corporate responsibility does not matter to investors. Our finding is similar to Wagner (2002), Korhonen (2003), Bauer et al. (2005), Wahba (2008), Valor et al. (2009). This result probably caused by investors in Indonesian listed companies, still does not put too much attention to corporate responsibility. Indonesia as a developing market and still attracts many investors because of its potential to increase in the future. Maybe that is why either responsibility rating or corporate governance rating do not have significant impact on the investors or stock s return. Conclusion Our research find at least in last twelve months, responsibility rating of company has no significant impact to stock s return. It means that either a company have low or high responsibility rating, it still does not change investment decision by investors. Beside responsibility rating, corporate governance rating also show no significancy in impacting stock s return. REFERENCES Bauer R, Koedijk K, Otten R (2005). International Evidence on Ethical Mutual Fund Performance and Style. J. Bank and Fin. 29: 1751-1767. Cummings L (2000). The Financial Performance of Ethical Investment Trusts: An Australian Perspective. J. Bus. Ethics, 25: 79-92. Fama E (1970). Efficient Capital Markets: Review of Theory and Empirical Evidence. J. Finan. 25: 383. Farber D (2005). Restoring Trust after Fraud: Does Corporate Governance Matter. Acc. Rev., 2: 539-561. Indonesian National Committee of Governance Policy. (2006). General Principle of Indonesian Good Corporate Governance. Jakarta: KNKG. Karamanou I, Vafeas N (2005). The Association between Corporate Boards, Audit Committees, and Management Earnings Forecasts: An Empirical Analysis. J. Acc. Res., 3: 453-486. Koehn D, Ueng J (2005). Evaluating the Evaluators: Should Investor Trust Corporate Governance Metrics Ratings? J. Manage. Govern., 9: 111-128. Korhonen, J (2003). Book Review: Sustainable Banking the Greening of Finance. Corp. Soc. Resp. Environ. Manage., 10: 112-114. Lo S, Sheu H (2010). Does Corporate Sustainability Matter to Investors? Afr. J. Bus. Manage., 4: 2856-2863. Mallin CA, Saadouni B, Briston RJ (1995). The Financial Performance of Ethical Investment Trusts. J. Bus. Finan. Acc., 22: 483-496. Myring M, Shortridge R (2010). Corporate Governance and The Quality of Financial Disclosures. Int. Bus. Econ. Res., J. 9: 103-110. Organisation for Economic Co-operation and Development. (2004). OECD Principles of Corporate Governance. Paris: OECD. Pickett K (2005). The Essential Handbook of Internal Auditing, 1 st ed. Chichester: John Wiley & Sons. Sauer D (1997). The Impact of Social-Responsibility Screens on Investment Performance: Evidence from Domini 400 Social Index and Domini Equity Mutual Funds. Rev. Finan. Econ., 6: 137-149. Shleifer A, Vishny R (1997). A Survey of Corporate Governance. J. Fin. Econ., 52: 737-783. Valor C, Cuesta MDL, Fernandez B (2009). Understanding Demand for Retail Socially Responsible Investment: A Survey of Individual Investors and Financial Consultants. Corp. Soc. Resp. Environ. Manage., 16: 1-14. Wagner M, Phu NV, azomahou T, Wehrmeyer W (2002). The Relationship between the Environmental and Economic Performance of Firms: An Empirical Analysis of the European Paper Industry. Corp. Soc. Resp. Environ. Manage., 9: 133-146. Wahba H (2008). Does the Market Value Corporate Environmental Responsibility? An Empirical Examination. Corp. Soc. Resp. Environ. Manage., 15: 89-99.