Page 1 of 17
Archives of Business Research – Vol. 9, No. 12
Publication Date: December 25, 2021
DOI:10.14738/abr.912.11368. Adila, N., & Arifin, Z. (2021). The Effect of Corporate Governance Mechanism on Company Value with Company Performance as
Intervening Variable. Archives of Business Research, 9(12). 115-131.
Services for Science and Education – United Kingdom
The Effect of Corporate Governance Mechanism on Company
Value with Company Performance as Intervening Variable
Nur Adila
Magister Management, Faculty of Business and Economics
Universitas Islam Indonesia
Zaenal Arifin
Magister Management, Faculty of Business and Economics
Universitas Islam Indonesia
ABSTRACT
Corporate Governance is a system that regulates and controls a company which
expected to give and increase Company Value to investors. With the existence of
Corporate Governance, it is expected that Company Performance will give a good
influence on the company. One of the cases is after Indonesia went through a
prolonged crisis since 1998, the repairing process in the companies took a long time
and it is caused by the weakness of Corporate Governance application in the
companies, which will affect the companies’ performance and decrease the
companies’ values. The purpose of this research is to analyze the effects of the
Corporate Governance mechanism on Company Value with Company Performance
as an intervening variable. The case study used in this research is the companies
included in IDX BUMN 20 Tahun 2020 list. The result of this study is that
Independent Commissioner doesn’t affect values and Company Performance, the
board of directors affects Company Value positively, the board of directors doesn’t
affect Company Performance. The Audit Committee doesn’t affect the Company
Value. The Audit Committee affects the Company Performance positively. The
Company Performance is not capable to mediate the independent commissioner’s
effect on Company Value. The Company Performance can mediate the effect of the
Board of Directors on the Company Value, the Company Performance can’t mediate
the effect of Audit Committee on the Company Value.
Keywords: Corporate Governance, Company Value, Intervening, Company Performance
INTRODUCTION
In the business world today, every company has to be fluctuating in dealing with the rapid
growth of the business world. Companies will always be demanded externally to meet the
market demand because of the fierce competition in the market to get good branding and
perception from every stakeholder. Therefore, the application of Corporate Governance is
trusted to improve the company’s value. Corporate Governance applied in an operational
system is used to monitor all activities in a company so the activities can run smoothly as the
company expected. According to IICG (The Indonesian Institute for Corporate Governance), the
definition of Corporate Governance is a series of mechanisms to direct and control a company
for the operator to run as what stakeholders expected.
Page 2 of 17
116
Archives of Business Research (ABR) Vol. 9, Issue 12, December-2021
Services for Science and Education – United Kingdom
The Corporate Governance mechanism consists of supporting elements that are Independent
Commissioner, Board of Directors, Institutional Ownership, Managerial Ownership, and Audit
Committee. According to [1] the performance of a company’s finance is a description of the real
situation of the result of the operation of the company’s achievement in a certain time. The long- term goal of the company is to maximize the company’s value by decreasing the capital cost.
The high value of the company will push the investors to invest in the company. Before the
investors invest stocks in a company, the investors’ first step is doing stock valuation based on
the information they get from the capital market.
Many studies related to Corporate Governance have been done, among others are [2] and [3]
stating that Corporate Governance affects significantly positively on Company Value. However,
different results are found in studies [4] and [5] stating that Corporate Governance doesn’t
affect the Company Value significantly. According to [6] the effect of Corporate Governance
towards Company Value with Company Performance as an intervening variable shows only
Company Performance affects positively on Company Value and only the Company
Performance proved to be an intervening variable. Corporate Governance can affect the
Company Performance and it can maximize the Company Value.
In this case, it can be concluded that the Company Performance can mediate the effect of
Corporate Governance on the Company Value. The difference in the results of the studies done
by the other researchers before makes the researcher want to research the topic with the
Company Value as an intervening variable.
PROBLEM STATEMENT
Many incidents related to bad Corporate Governance practices happened. One of the interesting
cases is the incident that happened to Garuda Indonesia in 2019. The problem was because the
quality of Corporate Governance done by the company was not good. Therefore, maintaining
and improving the quality of the Corporate Governance will affect the Company Performance
and the values of the company will increase. The inconsistency of researches on Corporate
Governance towards the company’s value makes the researcher include the Company
Performance in the study as an intervening variable and it is expected that the result will be
better in analysis related to the company’s variable.
THEORETICAL FRAMEWORK
Corporate Governance
According to [7] is a set of mechanisms to direct and control a company for the company’s
activities to be done as what the stakeholders expected (individuals). In other words, Corporate
Governance is an effort to improve the business’ performance by observing the management
exclusively by creating a system that is integrated between management and the other
stakeholders.
According to [8], [9] Corporate Governance has to consist of four main components that are
transparency, fairness, accountability, and responsibility. Transparency is the openness in
executing the decision-making process and informing relevant material information linked to
the company. Fairness is fair and equal treatment in fulfilling stakeholders’ rights based on
agreements and applicable laws and regulations. Accountability is the clarity of functions,
structures, system, and responsibilities of the company organs so that the company
Page 3 of 17
117
Adila, N., & Arifin, Z. (2021). The Effect of Corporate Governance Mechanism on Company Value with Company Performance as Intervening Variable.
Archives of Business Research, 9(12). 115-131.
URL: http://dx.doi.org/10.14738/abr.912.11368
management will run effectively. Responsibility is the compliance in the company management
on healthy corporate principles and laws and regulations.
Corporate Governance mechanism is a way to improve Corporate Governance by knowing the
effects on the Company Value as follows.
Independent Commissioner
Commissioners are responsible for observing the running of the company based on Corporate
Governance principles. Commissioners are also obliged to observe the Board of Directors’
performance and observe policy made by the Board of the Directors.
Board of Directors
The Board of Directors is the board members that are responsible for observing the running of
the company and also have an important role in a company. The Board of Directors also has a
role in observing the company’s development.
Institutional Ownership
According to [10] stating that Institutional Ownership is an important factor in minimalizing
conflicts between managers and stakeholders. Valuation in Corporate Governance mechanism,
the Institutional Ownership can be in an effective observation in steps of every decision-making
of the company manager.
Managerial Ownership
Managerial Ownership is a percentage of the stockholders, the managements who actively
participate in decision making in a company by directors and commissioners [11], the existence
of managerial ownership will cause an interesting assumption that the increase of managerial
ownership will affect the Company Value.
Audit Committee
According to [12], [13] stating that Audit Committee is one of the Committee formed by the
audit boards and responsible towards the Audit Committee with function and main
responsibility is overseeing the Corporate Governance principles, especially transparency and
disclosure applied consistently and adequately. Factors affecting the disclosure of Corporate
Governance are the Independency of the Audit Committee, company size, profitability, leverage,
and industry classification.
Corporate Governance and Company Performance
Company Performance is companies recorded in Corporate Governance Rank Score IICG which
applies good Corporate Governance and improves stock price directly. Theoretically, a good
Corporate Governance practice can improve the Company Performance and decrease the risk
done by the boards when making decisions for their profit. Generally, good Corporate
Governance gives trust to investors to invest their capital and affects the performance.
Corporate Governance and Company Value
According to [14] Corporate Governance practice is expected to be able to maximize the
Company Value. Companies who apply good Corporate Governance will get profit, good image