The Governance Role of Independent Directors in Indonesian Family and Non-Family Firms

Lukas Setia Atmaja, Athalia Ariati Hidayat

Abstract


This paper examines the governance role of independent directors in Indonesia using family and non-family firm samples. The literature suggests that independent directors can mitigate conflicts of interest between controlling families and non-controlling or minority shareholders among family firms. This study utilizes panel data of firms listed from 2005 to 2019, comprising 4.865 firm-year observations. Our result reveals that the performance of family firms is significantly worse than that of non-family firms measured by Tobin’s Q and that among family firms, independent directors or commissioners have an insignificance impact on firm value. Our findings support the expropriation theory and are not in line with the notion that independent directors can mitigate agency problems among family firms. Our analysis, however, provides strong evidence that independent directors or commissioners in non-family firms positively affect firm performance.


JEL: D74, G32, H11



Keywords


agency theory; family control; firm value; independent directors; two-tier board

Full Text:

PDF

References


Albawwat, A.H., Alrawashedh, Almansour, A., & N.H., Zobi, M. (2020). The effect of board of directors and audit committee characteristics on company performance in Jordan. International Journal of Financial Research, 11 (6), 10-24. https://doi.org/10.5430/ijfr.v11n6p10

Anderson, R.C. & Reeb, D.M., (2004). Board composition: Balancing family influence in S&P 500 firms. Administrative Science Quarterly, 49, 209-237. https://jstor.org/stable/4131472

Anderson, R.C., Mehta, M., Reeb, D.M., & Zhao, W. (2017). Family-friendly directors. Temple University Working Paper.

Arosa, B., Iturralde, T., and Maseda, A. (2010). Outsiders on the board of directors and firm performance: Evidence from Spanish non-listed family firms. Journal of Family Business Strategy, 1, 236-245. https://doi.org/10.1016/j.jfbs.2010.10.004

Bambang, M., & Hermawan, M. S. (2013). Founding family ownership and firm performance: empirical evidence from consumer goods industry in Indonesia. Journal of Applied Finance and Accounting, 4(2), 112-131. https://10.2139/ssm.2292375

Bettinelli, C. (2011). Boards of Directors in Family Firms: An Exploratory Study of Structure and Group Process. Family Business Review, 24(2), 151-169. https://doi.org/10.1177/0894486511402196

Claessens, S., Djankov, S., & Lang, L. (2000). The separation of ownership and control in East Asian corporation. Journal of Financial Economics, 58, 81-112. https://doi.org/10.1016/S0304-405X(00)00067-2

Corbetta, G., & Salvato, C. A. (2004). The Board of Directors in Family Firms: One Size Fits All? Family Business Review, 17(2), 119–134. https://doi.org/10.1111/j.1741- 6248.2004.00008.x

Cuadrado-Ballesteros, B., Rodriguez-Ariza, L., & Garcıa-Sanchez, I. (2015). The role of independent directors at family firms in relation to corporate social responsibilities disclosures. International Business Review, 24, 890-901. https://doi.org/10.1016/j.ibusrev .2015.04.002

Dahya, J., Dimitrov, O., & McConnell, J. J. (2008). Dominant shareholders, corporate boards, and corporate value: A cross-country analysis. Journal of Financial Economics, 87(1), 73–100. https://doi.org/10.1016/j.jfineco.2006.10.005

De Massis, A., Frattini, F., Majocchi, A., and Piscitello, L. (2018). Family firms in the global economy: Toward a deeper understanding of internationalization determinants, processes, and outcomes. Global Strategy Journal 8(1): 3-21. https://doi.org/10.1002/gsj.1199

Fuzi, S.F.S., Halim, S.A.H., & Julizaerma, M.K. (2016). Board independence and firm performance. Procedia Economics and Finance 37, 460-465.

Khosa, A. (2017). Independent directors and firm value of group-affiliated firms. International Journal of Accounting & Information Management, 25 (2), 217-236. https://10.1108/IJAIM-08-2016-0076

Masulis, R.W., Pham, P.K., & Zein, J. (2011). Family business groups around the world: financing advantages, control motivations, and organizational choices. The Review of Financial Studies, 24(11), 3556-3600.

Mulyani, E., Singh, H., & Mishra, S. (2016). Dividend, leverage and ownership in the emerging Indonesia market. Journal of International Financial Markets, Institutions and Money, 4, 16-29. https://doi.org/10.1016/j.intfin.2016.03.004

Prabowo, M., & Simpson, J. (2011). Independent directors and firm performance in family controlled firms: evidence from Indonesia. Asian-Pacific Economic Literature, 25 (1), 121-132. https://doi.org/10.1111/j.1467-8411.2011.01276.x

Poutziouris, P., Savva, C.S., dan Hadjielias, E. (2015). Family involvement and firm performance: Evidence from UK listed firms. Journal of Family Business Strategy, 6, 14-32. https://doi.org/10.1016/j.jfbs.2014.12.001

Samara, G., & Berbegal-Mirabent, J. (2018). Independent directors and family firm performance: does one size fit all? International Entrepreneurship and Management Journal, 14 (1), 149-172. https://doi.org/10.1007/s11365-017-0455-6

Setia-Atmaja, L., (2010). Dividend and debt policies of family controlled firms: The impact of board independence. International Journal of Managerial Finance, 6 (2), 128-142. https://doi.org/10.1108/17439131011032059

Suyono, E. (2018). Family involvement in firm’s management and productivity: An empirical evidence from Indonesia. Jurnal Keuangan dan Perbankan, 22(2), 73-82. https://doi.org/10.26905/jkdp.v22i2.1587

Tran, H.T. (2021), The link between independent directors and firm’s performance: the moderating role of corporate social responsibility. Corporate Governance, 21 (5,831- 844. https://doi.org/10.3390/ijerph18115830

Villalonga, B. & Amit, R. (2006). How do family ownership, control, and management, affect firm value? Journal of Financial Economics, 80, 385-417. https://doi.org/10.1016/j.jfineco.2004.12.005

Vintila, G. & Gherghina, S. C. (2013). Board of directors independence and firm value: Empirical evidence based on the Bucharest Stock Exchange Listed Companies. International Journal of Economics and Financial Issues, 3 (4), 885-900.

Zachro, S.F. & Utama, C.A. (2021). The effect of family ownership on the relationship between busy directors and stock price crash risk for listed firms on the Indonesia Stock Exchange. Jurnal Keuangan dan Perbankan, 25 (1), 63-80. https://doi.org/10.26905/jkdp.v25i1.4909




DOI: https://doi.org/10.26905/jkdp.v25i4.6382

Refbacks

  • There are currently no refbacks.


Bookmark and Share


Jurnal Keuangan dan Perbankan (Journal of Finance and Banking)

Diploma Program of Banking and Finance, Faculty of Economics and Business, University of Merdeka Malang

Published by University of Merdeka Malang

Mailing Address:
2nd floor Finance and Banking Building, Jl. Terusan Raya Dieng No. 57 Malang, East Java, Indonesia
Phone: +62 813-3180-1534
Email: jkp@unmer.ac.id

This work is licensed under a Creative
Commons Attribution-ShareAlike 4.0