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CHAPTER V
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS

This chapter presented the summary of the findings extracted from the interpretation and
analysis of the data, the conclusions derived from such findings and the recommendations the
proponents had formulated for the betterment of this research and for future researches to be
done by other interested parties.

Summary of Findings
The study focused on determining the Corporate Governance Practices and the ROE of
30 publicly listed Indonesian companies in order to determine the correlation between the two
aforementioned variables. The timeline of the study was for the fiscal/calendar year 2014. Data
were derived from the 2014 Annual Reports and website of the companies. The methodology
used in determining the correlation of ROE and Corporate Governance Practices was the
Pearsons product moment correlation coefficient. The sample was determined through
purposive sampling. Moreover, the researchers used STATA as the statistical tool to determine
the results of the gathered data.
Based on the data presented and analyzed, the researchers developed the findings of the
study. The findings from the results were summed up as follows:

A. Corporate Governance Practices: ICD Scorecard

The ICD Scorecard provided two levels of evaluation. The first level specified five parts
of consideration for Corporate Governance Practices. The parts consisted of the following: Part

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A (Rights of Shareholders), Part B (Equitable Treatment to Shareholders), and Part C (Roles of

Stakeholders), Part D (Disclosures and Transparency and Part E (Responsibilities of the Board)

Rights of Shareholders
The study found that most companies paid back its shareholders equitably and timely.
Most companies encouraged participation from shareholders in a general meeting. Further, it had
been found that only a few companies developed effective voting procedures during an AGM.

Equitable Treatment of Shareholders

Most companies had common stocks authorized for issue which carried one vote for each
such stock. They also publicized the voting rights attached to each class offered. Related party
dealings were conducted in an arms length transaction. Some companies had observed the
practice of notifying its shareholders on the details of the AGM.

Roles of Stakeholders
It was noted that the stakeholders of most companies were accorded an effective remedy
should their rights be violated by providing them the contact details of the company through
disclosures in the Annual Report or company website. Most companies had developed
performance-enhancing mechanisms for employee participation relating to employee welfare.
Majority of the companies observed openness of communication to the board from the
stakeholders regarding concerns on illegal or unethical acts. Lastly, most companies
implemented a whistleblowing system which served as an avenue for violations to be detected
and for the whistleblowers to be protected.

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Disclosures and Transparency

Most companies provided contact details regarding investor relations, details of company
website, disclosures on related party and related party transactions and the quality of annual
report. Annual Reports of the companies provided for a statement of compliance with the Code
of Corporate Governance and disclosed the reason in case of noncompliance. Further, the direct
and indirect holdings of directors, the dividend policy, the key risks faced by the company, the
number of board of directors and commissioners meetings held, the biographical details of
directors or commissioners, and the names of related parties and their respective relationship to
the company were disclosed. The companies, however, rarely disclosed the policies covering
related party transactions, the constitution and by-laws, the memorandum and articles of
association, and the audit and non-audit fees.

Responsibilities of the Board

Companies prominently complied with the consideration of directors development,
executive management appointments and performance, and board/committee/director appraisal.
Different persons assumed the role of Chairman of the Board and the Chief Executive Officer. At
least one non-executive director had prior working experience in the major sector the company
was operating in. Companies provided disclosure on the Annual Performance Assessment made
of the Board of Commissioners, Board of Directors, and Board Committees. Companies seldom
disclosed, however, the process and criteria as to which the performance assessment was based
upon.

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B. Financial Performance: Return on Equity

The study identified 12 industries in the sample, namely: automotive, banking, cement
production, cigarette production, wholesale consumer goods, food and beverage, media, mining
and related energy, pharmaceuticals, sale and rental of heavy equipment, telecommunications,
and transportation. Global Standard Ratios were determined for each industry and were
compared to the average ROE of the companies comprising each industry. The Average ROE for
companies under banking, cement production, cigarette production, wholesale consumer goods,
media, mining and related energy, and pharmaceuticals were above average. Companies under
automotive, food and beverage, sale and rental of heavy equipment, telecommunications, and
transportation had an ROE which were below average.

C. Correlation of ROE and Corporate Governance

The relationship of Corporate Governance and ROE had a weak positive relationship on
the Equitable Treatment of Shareholders (Part B), on the Roles of Stakeholders (Part C)
and on the Responsibilities of the Board (Part E). Moreover, it had a weak negative relationship
on the Rights of Shareholders (Part A) and on the Disclosures and Transparency (Part D).
Notwithstanding, the relationship for all variables were not statistically significant.

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Conclusion
Based on the analysis of data and testing of hypothesis, the researchers concluded that the
implementation of Good Corporate Governance practices, as determined in accordance with the
ICD ASEAN Corporate Governance Scorecard, did not directly affect the financial performance
of Indonesian companies as measured by Return on Equity,.

The results of the study were consistent with the results of Kara, Acer and Karabiyik
(2015) which posited that there is not much meaningful relationship between the corporate
governance and return on equity (ROE). Correlating the variables of corporate governance and
financial performance might prove irrelevant due to the multi-component structure of corporate
governance as reflected in the ASEAN Corporate Governance Scorecard.

Conversely, this studys conclusion had been in contrast to the study of Gruszczynski
(2006) which stated that there is a significant correlation between corporate governance and
financial performance in Poland. Further, this research did not support the study conducted by
Black & Khana (2007) which theorized that properly designed mandatory corporate governance
reforms in an emerging market like Indonesia can increase share prices and lead to improved
firm performance.

Thus, the researchers concluded to accept the Null Hypothesis 0: There was no
correlation between financial performance and corporate governance and reject the Alternative
Hypothesis A: There was a correlation between financial performance and corporate
governance.

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Issues and Gaps

Throughout the research, the proponents had encountered a couple of material issues in
the study. The financial and non-financial information obtained by the proponents were limited
only to available sources due to lack of access to significant company information. The sources
of information utilized by the proponents included only the fiscal/calendar year 2014 annual
reports and financial statements, the companys website and financial analysts and research
institutions sites and blogs. This want of access to valuable information and inadequacy of
sources constrained the proponents gathering of relevant information which might have created
a different outcome in the research process.
Another issue encountered was the usage of the return on equity (ROE) in correlating
financial performance and good corporate governance practices. The return on equity might not
be representative of a firms financial performance and the dissimilarities of values of the
different Indonesian Companies might be due to the differences of their capital structure and
firms risk appetite. Moreover, the business model in itself might not be that reliable since the p
value (pertaining to both the coefficient and the model) was not statistically significant.
Finally, on the ASEAN Corporate Governance itself, the independent variables therein
(the parts of the scorecard) demonstrated multi-colinearity that was, to some extent these
variables were connected to some matter of degree. For instance, Part A on the Rights of
Shareholders and Part B on the Equitable Treatment of Shareholders might exhibit relatively
similar or close characteristics. For this model to work effectively, variables must be stand-alone
and should not overlap the characteristics of other independent variables. This might not be
problematic, but
coefficient.

it might impair the interpretation of the data since increase the variance of the

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Recommendations
Based on the findings of this study, the researchers recommended that Indonesian
companies should enhance their existing governance structure. Additionally, they should
establish a process to check adequacy and effectiveness of their corporate governance.
Changes in the corporate governance structure were heading in the right direction. Thus,
the financial service authority in Indonesia should strengthen its regulations and oversight to
improve levels of compliance with corporate governance structure existing in the country. Board
Assurance Framework needs to be pragmatic and efficient to drive results and performance of
Indonesian companies.
To accurately measure the firm performance, future research should use a combination of
market and accounting-based measures. Market-based indicators would help to anticipate the
future performance while accounting-based measure could reflect the past performance of the
company.
Moreover, several relevant financial ratios should be used as indicators of good corporate
governance practices. Because of their ability to assess the companys capacity to generate
earnings net of the expenses and other relevant costs, return on asset, profit margin and other
ratios indicative of profitability were found to be suitable for measuring the companys
performance.
The period covered for the basis of determining the financial ratios should cover three to
five years in order to capture any significant factors such as mergers and acquisitions, financial
distress and environmental phenomena that would have an impact to the companys financial
well- being. On average, this longer period should suffice in assessing these matters because the
researchers realized that one-year might create bias on the statistical results.

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As much as possible, the research should incorporate other alternative sources of

information aside from reports coming from the companies and their respective company
websites. Furthermore, an understanding of the nature of business and the legal and economic
environment of each company might assist in determining the companys compliance on the
recommended practice of good corporate governance.