THE INFLUENCE OF GOOD CORPORATE GOVERNANCE

AND CORPORATE SOCIAL RESPONSIBILITY TOWARDS

FIRM’S VALUE: EVIDENCE FROM INDONESIAN BANKS

PAGE COVER

RESEARCH PROPOSAL

by

Violetta Winona

008201800015

FACULTY OF BUSINESS

ACCOUNTING STUDY PROGRAM

PRESIDENT UNIVERSITY

CIKARANG, BEKASI

2020
 TABLE OF CONTENTS
TABLE OF CONTENTS

PAGE COVER.........................................................................................................................0

TABLE OF CONTENTS..........................................................................................................i

CHAPTER I..............................................................................................................................1

INTRODUCTION....................................................................................................................1

1.1 Research Background.........................................................................................1

1.2 Research Problem..............................................................................................3

1.3 Research Objectives...........................................................................................3

1.4 Research scope and limitations..........................................................................4

1.5 Research benefits...............................................................................................4

CHAPTER II............................................................................................................................5

LITERATURE REVIEW........................................................................................................5

2.1 Theoretical Framework......................................................................................5

2.2 Hypothesis Development.................................................................................10

2.3 Research Framework........................................................................................13

CHAPTER III.........................................................................................................................14

RESEARCH METHOD........................................................................................................14

3.1 Secondary Data................................................................................................14

3.2 Sampling...........................................................................................................14

3.3 Variables and Measurement............................................................................15

3.4 Research Model................................................................................................17

REFERENCES.......................................................................................................................19

i
 CHAPTER I

INTRODUCTION

The first chapter of the research is going to explain a brief background of the main

topic of this study. The explanation in line with the discussion is started by the

factors influencing the company’s value and the starting point of this issue arises.

Therefore, research aims and questions will be proceeded based on the topic's

subject, along with the research proposal as the closure of the first chapter.  

1
1.1 Research Background

Good Corporate Governance (GCG) is a structure used to arrange and manage

all company's activities to achieve a sustainable economic value for

shareholders and stakeholders (Menteri Negara Badan Usaha Milik Negara,

2011). Investors tend to desire good corporate governance, which in line with

the dynamic competition. Therefore, the company management is required to

carry out its duties properly because it will influence the company's financial

performance. The company's profitability and sustainability can be increased

based on its ability to generate profits by utilizing its assets to achieve its

goals. The higher the company's profitability, the stakeholder's confidence that

the company can withstand the competitor's challenges is also increased. As a

result, this situation will attract potential investors to own these shares

(Juhmani, 2017).

The implementation of Good Corporate Governance (GCG) makes the

decision-making process by managerial progress better so that it is expected to

obtain the right decisions, increase work balance and effectiveness

(Balachandran & Faff, 2015). Previous research has proven empirically that

the company’s performance is positively influenced by the implementation of

GCG (Ararat et al., 2017). The study by Peni and Vähämaa (2012)

demonstrated that the ratios representing banking companies' profitability,

such as ROA, ROE, and NIM, are influenced by Good Corporate Governance

(GCG). The better corporate governance, the better the company will produce

a better return rate.

2
According to Filatotchev et al. (2013), implementing Good Corporate

Governance (GCG) will enable the company to reduce the problem that arises

from the agency theory between agents (managers) and principals

(shareholders). Good Corporate Governance (GCG) is closely related to

making investors believe that managers will provide benefits for them,

confident that managers will perform ethically, and based on the investors best

of interest (Filatotchev et al., 2013).

Over the last few years, there is a growing sense of social responsibility that

the banking world must be borne, which is not only responsible for the

monetary economy. Apart from that, there are ethical, social, and discretionary

responsibilities, which are considered to be responsibilities done by

individuals accord. Corporate Social Responsibility (SCR) is a commitment

upheld by a particular business to act conscientiously and contribute to the

improvement of the economy along with the advancement of local

communities and the wider community's welfare (Jizi et al., 2014).

The company's concern for the surrounding community or community

relations can be interpreted as an increase in the participation and position

within an organization through various efforts to benefit the company and

community (Jizi et al., 2014). That is what drives the banks in Indonesia to

carry out various related programs or activities with its social environment, for

example, Bank Indonesia, which created the slogan of B.I. Communicate -

Ecosystem, Small Medium Enterprise, and Education for People.

3
 Investors need complete information that can be compared with previous

years, which is the profitability ratio. Profitability is the primary indicator for

measuring the company's effectiveness as a whole, which is seen from its high

profit in one period. The Financial Services Authority serves as an institution

in charge of regulating and supervising financial institutions suggested for

banks in Indonesia to use the Return on Assets (ROA) to measure their

profitability since banks' assets mainly consist of public saving funds (Otoritas

Jasa Keuangan, 2015).

1.2 Research Problem

In line with the study's background above and other empirical studies, I would

like to explain and do further research regarding the influence of Good

Corporate Governance and Corporate Social Responsibility towards firm

value. The current research is formed with the research questions below:

1. How does Good Corporate Governance influence the banks’ profitability

in Indonesia?

2. How does Corporate Social Responsibility influence the banks’

profitability in Indonesia?

3. How does Good Corporate Governance influence the banks’ firm value in

Indonesia?

4. How does Corporate Social Responsibility influence the banks’ firm value

in Indonesia?

5. How does profitability influence the banks’ firm value in Indonesia?

4
1.3 Research Objectives

This study intends to get evidence concerning the influence of Good

Corporate Governance and Corporate Social Responsibility towards firm

value with the mediating variable of profitability. In this study, the researcher

would like to focus on the banking entity listed on the Indonesia Stock

Exchange. The study will be conducted using secondary data such as annual

financial reports of banks listed on the Indonesia Stock Exchange between

2017 and 2019.

1.4 Research scope and limitations

This study examines the influence of the implementation of Good Corporate

Governance and Corporate Social Responsibility towards the firm value with

the mediating variable of profitability. This study is quantitative study using

secondary data from both offline and online sources. This study has its

limitation. First, this study only focused on one industry. Moreover, this study

also only uses the annual report which consist of the financial data collected

are the last three years of accounting period respectively.as the source of the

data in measuring the variables.

5
1.5 Research benefits

The expected benefit of this study intended to worthwhile to several parties.

a. Researcher

The result of this study will enhance the researcher’s knowledge in

regards to whether the implementation of Good Corporate Governance

and Corporate Social Responsibility will eventually influence the

company’s profitability and value.

b. Other readers and future researchers

This study will become an additional reference for the benefit of future

researchers. Moreover, this study will inform the company in regards to

achieve a sustainable performance.

6
 CHAPTER II

LITERATURE REVIEW

This chapter will be emphasizing on three main focuses. The first section explains

the study's theoretical framework, which consists of firm value, profitability,

Good Corporate Governance, and Corporate Social Responsibility. The second

and third section consists of the hypothesis development followed by the proposed

research framework.

2.1 Theoretical Framework

2.2.1 Firm Value

According to Lozano et al. (2016), firm value is a value needed by

investors to consider investors' investing decisions. The study argued

that firm valuation is the investor's perception of the percentage of

business results, which is often tied to the stock price. Following the

study done by Ammann & Oesch (2011), firm value is the utility of

the company's market performance. This value indicates the market's

desire and confidence in the company's inherent value. Stock prices

above book value demonstrate market appreciation, and stock prices

below book value indicate market depreciation. If the firm's value

7
 shown an increase, it shows that the market thinks the company has

good prospects and vice versa.

2.2.2 Profitability

Investors commonly use profitability as an essential indicator in their

investment decisions because the more significant the dividend pay-

out, the more it saves the cost of capital. By offering high returns,

investors tend to be attracted to invest in a particular investment

(Garcia & Guerreiro, 2016). Nowadays, many businesses focus their

success purely on financial performance. The model embraced by all

of these businesses is profit-driven. Companies that can make

significant profits can be said to be productive and have satisfactory

financial accomplishment. Conversely, if the profit is shown to be

inadequate, it may be concluded that the company is less productive

or that the outcome is not successful. Thus, the output of the firm is

the ability of the company to earn net income.

The companies' profit will be the basis for distributing the company's

dividends, whether in cash dividends or stock dividends. The

difference between incoming assets (income and profits) and outgoing

assets (expenses and losses) is accumulated as its profit. The

company's profit can be in the form of retained earnings or be divided

as cash dividends such that it will correspondently increase the return

on investment (Garcia & Guerreiro, 2016). Investors frequently aimed

8
to get a considerable return, which consists of yields and capital gains.

The higher the opportunity to make profits, the higher the anticipated

yield, which would increase the company's business efficiency.

a. Profitability Measurement

High profitability in a company indicates a good prospect for

company development. Thus, investors will respond positively to

these signals resulting in the increase of the firm's value in the

market. There are several measurements with regards to the

company’s profitability including the amount of operating profit,

net income, return on investment or assets, and return on owner's

equity. The profitability ratio or profitability ratio shows its

success in generating profits (Sujud & Hashem, 2017).

Return on Assets (ROA) is one of the indicators to measure the

profitability of a company. Otoritas Jasa Keuangan (OJK) and

Bank of Indonesia (B.I.) suggested banks in Indonesia to use ROA

as the profitability measurement because it is relevant to the

operational of the bank which commonly involve in public savings

funds and credit or financing (Otoritas Jasa Keuangan, 2015).

Thus, the ROA is most suitable measurement for the profitability

of banking in Indonesia. The higher the ROA, the higher the

bank's profitability, thus improving its effectiveness in managing

or using its assets (Sujud & Hashem, 2017).

9
2.2.3 Good Corporate Governance

a. Agency Theory

According to Shi et al. (2017), agency theory arises because of a

conflict of interest between shareholders and managers because

both parties do not have similar goals. As an agent, the manager is

morally responsible for optimizing the owners' benefits (principal).

Still, on the other hand, the manager also has an interest in

maximizing their welfare (Panda & Leepsa, 2017). Therefore,

there is a big possibility that the agent will act accordingly to their

interests without considering the principals interests.

Agency problems arise due to the separation of duties between

company management holders and shareholders because there is a

segregation between the decision-maker and its owner. Agency

problems will continue to emerge until a compensation system is

developed, including the balance of interests between management

and shareholders. As far as agency philosophy is concerned, it is

assumed that the application of good corporate governance would

mitigate the conflicts of interest to make the company's operating

operations optimal (Shi et al., 2017).

10
 b. Good Corporate Governance Concept

Good corporate governance is a system that governs the

association between different stakeholders, in particular in terms

of the relationship between the parties concerned in order to

achieve the aims of the business (Shank et al., 2013). This method

has a major effect on the translation of company goals or on the

accomplishment of corporate governance objectives. The

enforcement of good corporate governance in Indonesia is based

on the governor's rule, stressing the value of good corporate

governance in order to prevent infringements of the legislation in

the company's activities.

2.2.4 Corporate Social Responsibility

a. Legitimacy Theory

Legitimacy Theory described that entity should have a

responsibility with societies to perform their operations

accordingly with the fairness principles to legitimize their actions

(Lanis & Richardson, 2013). Legitimacy may be seen as a

convergence of expectations or opinions that a person's action is

an action that is expected, acceptable, or in compliance with a

historically established set of norms, principles, convictions, and

meanings (Khan et al., 2013). Legitimacy is considered necessary

11
 for the company’s future development because the community's

legitimacy to the company is considered to be a strategic factor.

According to Tilling and Tilt (2010), organizational legitimacy

can be seen as something that society offers to businesses and

something that the organization needs or wants from the

environment. Legitimacy thus benefits the longevity of a business.

In terms of credibility theory, it is anticipated that the theory

would encourage companies to be mindful of the value of

transparency and corporate social responsibility that companies

need to improve the broader society's integrity.

b. Signaling Theory

Signaling theory describes how the signs of success or loss of

management (agent) should be transmitted to the owner

(principal). This idea illustrates why businesses should be allowed

to voluntarily provide information on the stock market, even if

there is no order from the regulator. The details disclosed by the

management is meant to be reserved for investors who are

involved in the firm. Financial information submitted by

companies also aims to reduce information asymmetry between

each parties (Su et al., 2016).

An annual report is a type of information provided by a company

that can be considered as a form accountability and sign for the

12
 external users. The annual report should provide the essential and

necessary material for the report's users, both within and outside

the organization. Investors may use this analysis to determine each

company's relative risk so that they can diversify their portfolio

and investment mix for the optimal risk preference. If a company

intends its shares to be acquired by buyers, it must clearly and

openly publish the financial statements.

c. Corporate Social Responsibility Disclosure

The concept of Corporate Social Responsibility is based on the

company's vision and purpose, and is tailored to the desires,

expectations, and preferences of society. According to Moura-

Leite and Padgett (2011), Corporate Social Responsibility (CSR)

is a corporate responsibility to uphold ethical conduct, to perform

legal action, and to contribute to developing the economy, along

with improving the local communities’ welfare.

According to Jizi et al. (2014), Corporate Social Responsibility

(CSR) is a concept that implies how an organization must

consciously pay attention to the well-being of the broader

community. Furthermore, the study indicated CSR as a company's

commitment to be responsible for the social, economic, and

environmental implications of activities and ensure that these

impacts add to society's benefits. Consistent CSR application will

13
 cultivate a sense of triviality between the community and the

company in the long term.

2.2 Hypothesis Development

From the framework tested, five hypotheses will be tested in this study,

namely:

2.2.1 The Influence of GCG on Banking Profitability in Indonesia.

Corporate governance is a principle that implemented accordingly to

the agency theory. It is intended to provide the clients with confidence

that they will be able to obtain the return from the ventures that have

been allocated to the company. Corporate governance is concerned

with how investors trust that managers can provide benefits to them

and will not intervene with ventures that are not money linked to the

contribution of investors and contribute to how investors monitor

managers (Lozano et al., 2016).

The empirical results of Peni & Vähämaa (2012) prove that the

smaller the GCG composite value, this indicates that the

implementation of GCG by banks is getting better, so that it can

improve bank financial performance as reflected in the ROA value.

This research also supported by the research proposed by Suaryana

(2005) and has been proven also by Tjondro and Wilopo (2011).

Accordingly, the hypothesis being tested is as follow:

H1: GCG influence the profitability of banks in Indonesia.

14
2.2.2 The Influence of CSR on Banking Profitability in Indonesia

Corporate Social Responsibility (CSR) disclosure is utilized to

connect with stakeholders between businesses. It is proposed that

corporate social responsibility is an entrance point where a variety of

companies use it to raise profit or boost credibility (Jizi et al., 2014).

The empirical results of Khan et al. (2013); Byus et al. (2010) proved

that there is a definite association between Corporate Social

Responsibility with company profitability. Based on this, the

hypothesis being tested is:

H2: CSR influence the profitability of banks in Indonesia.

2.2.3 The Influence of GCG on the Value of Banking Firms in Indonesia

GCG is a system used by the "Board" to direct, control, and supervise

organizational resources management, including their efficiency,

effectiveness, and productiveness (Ararat et al., 2017). The concept

described that corporate governance is a method used to control and

maintain the organization's operations. The method has a significant

impact on the setting of entity priorities and the accomplishment of

objectives. Corporate governance also impacts optimal business

performance and in analyzing business risks faced by companies.

Unhealthy corporate governance can lead to the temptation to abuse

one's position. Governing board and management weak company,

15
 unethical business ethics, and moral management unfavorable also can

harm stakeholder members, especially the stakeholders, shareholders,

creditors, supplier companies, and employees (Filatotchev et al.,

2013).

According to Klein et al. (2005) found that there was a significant

influence of GCG on the company’s firm value. Study by Gürbüz’ et

al. (2010) shows that GCG has a positive impact on firm value.

According to the previous research, the hypothesis being tested is:

H3: GCG influence the value of banking companies in Indonesia.

2.2.4 The Influence of CSR on the Value of Banking Firms in Indonesia

According to Lanis and Richardson (2013), CSR is a corporate

responsibility to uphold ethical conduct, perform legal action, and

contribute to developing the economy. Corporate social responsibility

contains a broad definition of just setting aside funds for corporate

social activities. Initially, corporate social responsibility changed from

philanthropy to corporate citizenship, which means that there is

reconciliation of the social order and a larger commitment to society.

Empirical studies conducted by Crisostomo et al. (2011) proved that

CSR has an influence significantly on firm value. Siallagan and

Machfoedz (2006) also prove that CSR has an effect on improving the

company's market performance which eventually contribute to the

16
 value of a company. Based on previous research, the hypothesis being

tested is:

H4: CSR influence the value of banking companies in Indonesia.

2.2.5 The Influence of Profitability on the Firm's Value

Every company certainly wants high corporate value because this

indirectly shows the increased prosperity of shareholders. Firm value

can be obtained from its ability to manage its assets into profit (ROA).

High ROA is an excellent indication to prospective buyers to spend

their funds in the venture. Prospective investors conclude that high

earnings will offer a high rate of return (dividend). It will result in the

prospective investor's perception of the company to be risen, followed

by a rise in the company's stock market price.

An empirical study conducted by Li et al. (2018) proves that financial

performance variables as measured by return on assets (ROA) and

return on equity (ROE) have a considerable influence on firm value.

According to this previous research, the hypothesis being tested is:

H5: Profitability influence the value of the banking company in

Indonesia.

2.3 Research Framework

Based on the background, problem formulation, and literature review, it can

be concluded that this research was conducted to prove and analyze the

influence of GCG and CSR towards firm value with profitability as mediating

17
variables in banking companies listed on the IDX. The thought process

framework begins with examining theories, previous researchers, and the

phenomena that underlie the influence between these variables. Theories are

needed because they provide a basis for analysis and guide the thinking

process. Theory is universal, which means it applies anywhere but can be used

for specific cases. Therefore, theoretical studies lead to thinking deductively,

namely, a thinking process that starts from a general thinking process leading

to a particular method of thinking.

Good Corporate
Governance
(X1)
Profitability Firm Value

(Z) (Y)
Corporate Social
Responsibility
(X2)

18
 CHAPTER III

RESEARCH METHOD

3.1 Secondary Data

This research will use the method of quantitative analysis with secondary

data sources. The source of this research data refers to data from the

Indonesia Stock Exchange. Data are obtained on the Indonesia Stock

Exchange consisting the annual financial reports of banks listed on the

Indonesia Stock Exchange. This study will use the data from the annual

financial statements listed on the IDX with a span of three years, namely

January 1, 2017 to December 31, 2019. The years 2017 - 2019 are used in

this study because the researcher would like to know the impact after a

change in policy regarding the level assessment of banking health

according to Bank Indonesia regulations.

3.2 Sampling

This study's population are banking companies listed on the Indonesia

Stock Exchange during the period of 2017 - 2019. The sample of this

research will use the method of purposive sampling. Purposive sampling is

based on the researcher's consideration, including the characteristics that

19
 have been known before. There are 43 banking companies used as the

sample. The criteria are:

1. Listed on the Indonesia Stock Exchange from 2017 to 2019.

2. Banks that operate using conventional systems during the period

January 1, 2017 to December 31, 2019.

3. Have complete financial historical data.

Based on the criteria above, these are the list of banks that have been

included:

3.3 Variables and Measurement

3.3.1 Independent Variables

a. Good Corporate Governance

Good Corporate Governance is a mechanism that regulate the

relationship between various interested parties to achieve the

company’s goals (Shank et al., 2013). In this analysis, the GCG

was calculated using the GCG self-assessment composite score.

The category of evaluation for the application of the GCG

principles is the composite ranking, which includes eleven

criteria for the assessment of GCG results. According to a

circular letter from the Bank of Indonesia, there are multiple

stages to the final outcome of the composite evaluation in the

GCG self-assessment survey. In this study, the data used to see

the results of the GCG self-assessment reporting is secondary

20
 data obtained through the annual reports of banking companies

for 2017 - 2019. All data on the results of GCG self-assessment

reports are obtained through the Indonesia Stock Exchange.

b. Corporate Social Responsibility

Corporate Social Responsibility is the company’s contribution

to the society in intending to achieve sustainable community

growth while maintaining the balance of social and

environment aspects (Jizi et al., 2014). The Corporate Social

Responsibility Index (CSRDI), GRI (Global Monitoring Index)

2010, and ISO 26000 are used to measure corporate social

responsibility in this analysis. Implementation of CSR

performance indicators is formulated based on information on

the use of 77 items of performance indicator indicators as a

form of company contribution.

Implementation of CSR performance metrics relies on

information on the use of 77 performance indicators as a

method of business contribution. A value of one is given to

measure CSR if it is exposed and zero if it is not disclosed. In

addition, the scores for each item are added together to generate

the final score for each business. To determine the CSR

disclosure table, a tabulation procedure based on the CSR

collection or checklist is used. CSR measurements were carried

21
 out over three years, from 2017 to 2019. The following is the

formula for calculating the Corporate Social Responsibility

Disclosure Index (CSRDI):

X ij
CSRI j=∑
nj

CSRI j :Corporate Social Responsibility Index of company j

X ij :Dummy variable; 1 = if item is disclosed; 0 = if item is

not disclosed

n j : The number of items for company j, nj, ≤ 77, so, 0 ≤

CSRDIj ≤ 1

Thus, 0 ≤ CSRI j≤ 1

3.3.2 Mediating Variable

Profitability is the capability of a particular company to make a

profit within a given amount of time (Singapurwoko & El-Wahid,

2011). The cost-effectiveness portion of this study is determined by

ROA. ROA is the ability of the organization to gain profits from

banking assets for a given period of time (Lee & Hsieh, 2013). The

size of the estimation of this analysis uses the ratio, and ROA can

be formulated as follows:

Net Income
ROA= x 100 %
Total Assets

22
 3.3.3 Dependent Variable

Firm value is the value provided by the market for company

performance (Lozano et al., 2016). This value indicates the desire

for market confidence in the company's intrinsic value. Market

appreciation is shown by stock prices above the book value, and

market deflation is seen by stock prices below the book value. If

the market offers more value, it shows that the market assumes that

the business has positive prospects and vice versa (Crisóstomo et

al., 2011). The firm value element in this analysis is calculated by

the Book Value Price (PBV). Price to Book Value (PBV) can be

used as a contrast between the trading stock price of the company's

stock. The measurement scale for the firm value variable in this

study is the ratio of Price to Book Value (PBV), which can be

formulated as follows:

Market Price per Share

PBV =
Book Value per Share

3.4 Research Model

The research design is in the form of a plan drawn up during the research

process to be carried out by the researcher. The basis of this research is

quantitative research. The research design is used as a reference for

collecting and evaluating data (Zyphur & Pierides, 2017). This research is

23
included in explanatory research, namely research that aims to explain the

relationship between variables through hypothesis testing. It also aims to

analyze one variable's relationship or influence with other variables' data

(Zyphur & Pierides, 2017). This test generally describes the relationship's

nature, determining the difference between two or more independent

factors in a situation. This research can also be causal research because it

is designed to identify causal relationships between variables. The causal

relationship examined in this study is the effect of the independent

variables, namely GCG and CSR, on the dependent variable, namely firm

value, and the mediating variable, namely profitability.

Based on these explanations, both theoretical explanations and empirical

studies, there is still controversy regarding the causal relationship studied

in previous researchers. Researchers are interested in researching the effect

of Good Corporate Governance and Corporate Social Responsibility on

company value with profitability as a mediating variable.

24
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