The Board Governance Practices in Indonesia

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*Corresponding author: [email protected]

Form over Substance: The Board Governance Practices in Indonesia

NURENI WIJAYATI Universitas Indonesia, Indonesia

Abstract: The study aims to investigate the decoupling behavior wherein firms tend only to formally adopt written policies while avoiding implementing internal corporate governance mechanisms substantively. The analysis is focused on the area of the board's responsibility. The sample consists of 487 firm-year observations having the ASEAN Corporate Governance Scorecard (ACGS) for 2013-2017. Using institutional theory, the research finds that fifty-seven percent (279 out of 487 observations) in the sample show decoupling behavior. Decoupling behavior is more pronounced in large firms with lower performance and higher leverage. Furthermore, the financial (banking) industry is less likely to behave decoupling due to the industry's highly regulated and enforced nature.

Keywords: Board Governance, Decoupling, ASEAN Corporate Governance Scorecard

Abstrak: Studi ini bertujuan untuk menginvestigasi perilaku “decoupling” di mana perusahaan cenderung hanya mengadopsi kebijakan tertulis secara formal, sementara mereka enggan untuk menerapkan mekanisme tata kelola perusahaan secara substantif.

Analisis difokuskan pada area tanggung jawab Dewan. Sampel penelitian terdiri dari 487 observasi yang memiliki ASEAN Corporate Governance Scorecard (ACGS) untuk periode 2013-2017. Dengan menggunakan teori institusional, penelitian ini menemukan bahwa lima puluh tujuh persen (279 dari 487 observasi) dalam sampel menunjukkan perilaku decoupling. Perilaku decoupling lebih banyak dilakukan di perusahaan besar dengan kinerja yang lebih rendah dan tingkat leverage yang lebih tinggi. Selain itu, industri keuangan (perbankan) cenderung tidak berperilaku decoupling karena sifat dari industri ini yang diatur dan diawasi sangat ketat.

Kata Kunci: Tata Kelola Dewan, Decoupling, ASEAN Corporate Governance Scorecard

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1. Introduction

Corporate governance has been abundantly investigated by utilizing agency theory.

The main perspective of agency theory is to reduce agency conflicts through monitoring.

Debates of corporate governance mechanisms mostly end up at the same point, i.e., the board mechanisms. The discussion extensively centers on the board's effectiveness how the board monitors the management. Various best practices of board mechanisms are created to cope with the agency problems, such as the attendance of independent boards, board composition, the existence of audit and remuneration committees. However, adopting such best practices leaves an interesting question of how well it works.

Institutional scholars argue that formal adoption of corporate governance does not always indicate an actual implementation of good corporate governance (e.g., Krenn, 2014; MacLean & Behnam, 2010; Aguilera & Cuervo-Cazurra, 2009; Westphal and Zajac, 1998).

Agency theory fails to explain why different countries with the same corporate governance codes have different results of governance implementation because agency theory does not incorporate institutional factors (Aguilera & Jackson, 2003). Proponents of the institutional theory argue that the institutional framework specific to a country (law system, politics, and culture) influences the effectiveness of corporate governance mechanisms (Oehmichen, 2018; Aguilera & Cuervo-Cazurra, 2009, 2004; Yoshikawa et al., 2007). Thus, it can be said that a country with a particular institutional environment experiences isomorphic processes that trigger corporate governance practices to be more similar across firms in the country (Aguilera & Jackson, 2003, 2010).

The adoption of good corporate governance is encouraged by issuing corporate governance principles or codes. The Code is voluntary, but firms, particularly listed firms, must disclose the extent to which they comply with the principles; otherwise, they have to explain the non-compliance items. One of the reasons why firms adopt the principles is to gain legitimacy. The companies only comply without considering their relevance and benefits. They are just copying and accepting what the others did to be

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3 regarded as legitimate. This process is called institutional isomorphism (DiMaggio &

Powell, 1983), in which an organization will conform to the institutional environment.

Institutional isomorphism displays a ceremonial and symbolic role rather than a substantive role (Gendron et al., 2004).

This paper addresses the question of "Do listed firms merely comply formally with board governance principles without having substantive implementation?". Even though corporate governance practices in Indonesia have improved much since the 1997 Asian financial crisis, the actual implementation is still in doubt. Drawing from institutional theory, the paper analyzes qualitatively by describing the corporate governance practices of Indonesian listed firms whether they tend to adopt board mechanisms symbolically or not. The analysis is based on the ASEAN Corporate Governance Scorecard—for the 2013–2017 Responsibility of the Board (RoB) component, provided by the Indonesian Institute for Corporate Directorship (IICD).

In 2015 OJK (Otoritas Jasa Keuangan or the Indonesia Financial Services Authority) introduced a comply-or-explain approach (POJK No. 21/POJK.04/2015.

Penerapan Pedoman Tata Kelola Perusahaan Terbuka, 2015). Publicly listed firms are required to comply with corporate governance codes and regulations, and they have to explain if there are non-compliance items of the Code. However, the OJK regulation does not impose any sanction or penalty for not explaining deviations from the Code.

The comply-or-explain mechanism gives flexibility for companies in implementing the Code. It may result in suboptimal good governance practices.

The study contributes to the literature on corporate governance using institutional theory instead of agency theory (Cohen et al., 2008). As mentioned earlier, the institutional theory is a promising theory to explain codes compliance (Cuomo et al., 2016; Aguilera & Cuervo-Cazurra, 2009, 2004). It provides a better understanding of how effective the corporate governance codes prescribed by western best practices or transnational organizations (such as OECD) are implemented in developing countries.

It is argued that certain corporate governance models do not necessarily translate into the same outcome or one size does not fit all (Arcot & Bruno, 2007; Black et al., 2010;

Hermes et al., 2006; Hofstetter, 2005; Osma & Noguer, 2007;).

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Furthermore, research on code compliance in south-east Asia countries is very limited; among others are Nowland (2008a), Ananchotikul et al. (2010) in Thailand, Wan Ismail et al. (2010), and Wahab et al. (2007) in Malaysia. All those studies were conducted using sample observations in the periods within a range of 2000–2007, and they referred to old OECD corporate governance principles. The study extends the literature on code compliance by examining Indonesian listed firms for 2013–2017 and following the latest OECD Principles of Corporate Governance (OECD, 2015). The study also provides insights, particularly for the regulators to understand the real practices of corporate governance in Indonesia. Indonesian firms still struggle to implement the international best practices of good corporate governance. The Indonesian regulators (OJK, BEI) need to strengthen their enforcement role to improve the codes/regulations compliance.

The structure of the paper is composed of: part 2 discusses institutional theory, part 3 explains the data and methodology used, part 4 presents the quantitative descriptive analyses, and part 5 concludes the results.

2. Theoretical Framework 1.1. Institutional Theory

Corporate governance codes comprise principles or recommendations for running a company in a good governance way. Unlike a rule or regulation with enforcement attributes, the Code is non-binding, and it provides flexibility for companies to follow or not to follow (Haskovec, 2012). Essentially, the Code is voluntary, and no one can punish it if a firm does not comply with it. Corporate governance codes in the world are typically created for capital market transparency in developed countries, notably characterized by market-based mechanisms (Krenn, 2014). The common feature of the Code is voluntary compliance and mandatory disclosure, meaning that companies (listed companies) have to display whether they are complying with the code provisions or not. If they are not complying, they have to explain why they deviate from the code provisions (known as the comply-or-explain approach — Aguilera & Cuervo-Cazurra, 2009; Arcot & Bruno, 2007; Cuomo et al., 2016).

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5 Two main motives of code adoption are primarily discussed in the organization literature, i.e., efficiency (rational) reasons and legitimation (symbolic) reasons ( Zattoni

& Cuomo, 2008; Aguilera & Cuervo-Cazurra, 2004; Hermes et al., 2006). Rational reasons assert that an organization complies with codes or programs because it believes in the benefits gained by adopting the codes. On the other hand, legitimation reasons suggest that codes or programs are adopted due to their taken-for-granted (Westphal &

Zajac, 1998; Tolbert & Zucker, 1983). Organizations or firms adapt to their environment. They try to mitigate uncertainty by following the influencing actor considered a benchmark or a best practice. In effect, the organizations are going to be in harmony among them. The process is called isomorphism (DiMaggio & Powell, 1983). DiMaggio & Powell (1983) classify institutional isomorphism into three types, i.e., mimetic, coercive, and normative.

Mimetic isomorphism arises when there is a high level of environmental uncertainty, such as a new invention in technology or new practice. It causes organizations to copy the practices of another entity. They just follow the benchmark without considering whether it is fit or not for their organization. Coercive isomorphism is sort of a mandatory change. It results from powerful external parties who require organizations to comply. They can be a regulatory agency, a certification body, or a trade association. A minimum number of independent board members stipulated by a country's capital market regulator is a clear example of coercive isomorphism.

Normative isomorphism emerges as a result of established norms and values. The conformity to institutional norms and values can be reached through socialization mechanisms such as training, continuing professional development, and workshop. The idea is that convergence can be achieved through promotion and socialization when there is a belief that a particular norm and value is beneficial.

Companies try to acquire legitimacy by visually declaring their compliance, but they do not necessarily implement actual practice (Krenn, 2014; MacLean & Behnam, 2010; Zajac & Westphal, 1994; Oliver, 1991). Decoupling is the term used to explain that a company, in appearance, complies with codes or programs while simultaneously avoiding following through with code recommendations. Empirical research has shown

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that companies formally comply with codes or regulations to merely gain external legitimacy resulting in form instead of substance (Akkermans et al., 2007; Fiss & Zajac, 2006; Trullen & Stevenson, 2006; Westphal & Fredrickson, 2001; Westphal & Zajac, 1998; Zajac & Westphal, 1994).

1.2. Corporate Governance Research using Institutional Theory

Judge (2009), in his editorial note, asserts that even though agency theory has dominated the corporate governance literature, it has some drawbacks that researchers may not be aware of. Agency theory is often less powerful when it is applied in non- Anglo-Saxon countries. Different institutional frameworks in non-Anglo-Saxon countries should be considered significant factors that can explain better corporate governance practices (Oehmichen, 2018; Yoshikawa et al., 2007). Research on corporate governance using institutional theory is limited as compared to agency theory (Cuomo et al., 2016, p. 230-231)¹.

Formal prescription of board mechanisms is best provided by agency theory, such as the presence of independent board members and an audit committee. Every country or firm can simply say that they comply with the formal prescription. However, agency theory does not consider institutional factors that influence the implementation of corporate governance mechanisms (Aguilera & Jackson, 2003). For instance, corporate governance practices may be determined by the law system, the economic system, politics, and culture (Oehmichen, 2018; Zattoni & Cuomo, 2008). Furthermore, Oehmichen (2018) argues that the existence of good laws and codes does not necessarily imply sound implementation. In the Asian emerging markets context, weak enforcement of law and lack of judicial trust affect the effectiveness of corporate governance implementation.

Perhaps, Kalbers & Fogarty (1998) is the first research that examines the relative strength between agency theory and institutional theory concerning the effectiveness of

1 Cuomo et al. (2016) reviewed studies on corporate governance codes during 1992-2014.

One of the main results is that 30% of the total studies utilize agency theory while only 7% use institutional theory, 42% have no clear theory, and the rest apply other theories.

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7 audit committee's function. Their findings suggest that agency theory cannot explain the audit committee's effectiveness, implying that the existence of the audit committees may display more symbolic and ceremonial types. Westphal & Zajac (1998) investigate the symbolic adoption of a program and suggest that the symbolic corporate action can deter other more substantive governance reforms. Cohen et al. (2008) argue that the ceremonial role may cause appointed board members to come from a similar background and result in more compromise with the management. This leads to a challenging question about the independence of independent boards.

Because of the flexibility of the Corporate Governance Code (Code), institutionalists argue that the Code is less effective in improving corporate governance practices. The different institutional frameworks may explain the behavior of the adoption of codes. It is argued that civil law countries tend to adopt codes later by reasons of legitimation or symbolic rather than efficiency reasons (Zattoni & Cuomo, 2008). Globalization and political pressures lead countries and companies to import corporate governance codes from the Anglo-Saxon model (Zattoni & Cuomo, 2008;

Khanna & Palepu, 2004). After the Asian financial crisis in 1998, the south-east Asian countries were imposed to adopt Anglo-American good corporate governance prescriptions of the international organizations such as the OECD and the World Bank (Nowland, 2008a). Since then, there has been much improvement in corporate governance practices and the level of transparency (Ananchotikul & Eichengreen, 2009;

Nowland, 2008b).

However, firms may merely comply with codes and depart from substantive implementation at the same time. Ananchotikul et al. (2010) investigate listed firms in Thailand and label 12% of the listed firms as 'talk only firms', i.e., concerning board and shareholder rights policies adoption, firms declare their voluntary compliance with the Thai corporate governance code. However, they do not realize the implementation of the policies. Similarly, Wan Ismail et al. (2010) investigate the effectiveness of the Malaysian Code of corporate governance. Their study finds that board governance is less effective, particularly in non-state-owned companies, suggesting that implementing the Anglo-Saxon model is less effective in a developing country.

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To some extent, the appointment of independent directors merely to comply with regulations (Peasnell et al., 2003; Siregar & Utama, 2008). Wan Ismail et al. (2010) investigate Malaysian listed firms which follow comply and explain basis. The results indicate no association between earnings quality and board independence & non- executive directors, suggesting that the listed firms have complied with the Malaysian Code. However, the monitoring function is less effective than those in developed countries. In line with this, Ananchotikul et al. (2010) find that in Thailand, 'talk only' listed firms tend to commit fraud, implying that the firms conform to provisions shallowly without substantial implementation. As the effectiveness of board function in Indonesia is underperformed (ADB, 2017; Siregar, 2019; Wijayati et al., 2015), it is presumed that companies in Indonesia tend to comply formally or symbolically with the Code merely but lack substantive actions.

3. Research Method 3.1. Sampling

The sample of this study consists of Indonesian listed companies that have the ASEAN Corporate Governance Scorecard (ACGS) for 2013-2017. Since 2013, Asian Development Bank (ADB) has assessed the corporate governance performance of publicly listed companies in the six ASEAN countries. In Indonesia, the assessment process has been undertaken by IICD, a non-profit organization aiming at promoting the best practices of good corporate governance. IICD selected the companies from various industries to be scored based upon the top 100 market capitalization. The initial sample is 495 firm-year observations, whereby two firms have incomplete financial data, and six observations have negative equities. Therefore, the final sample is 487 firm-year observations. The financial data of the companies were retrieved from Datastream/Thompson Reuters and the annual reports.

3.2. Variables

Research's variables were derived from the scorecard of Responsibilities of the Board (RoB) provided by the Indonesian Institute for Corporate Directorship (IICD) based on the ASEAN Corporate Governance Scorecard (ACGS) for the period 2013-

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9 2017. RoB consists of 74 question items capturing the board structure and the board working process, including the disclosures (ACMF, 2015). The ACGS is mainly referred to as the OECD Principles of Corporate Governance (2015). All questions in ACGS (RoB) have equal weights. The answer to each question is a simple yes or no.

Questions answered with yes get a score of 1; questions for which the answer is no to obtain a score of 0. The detail of the 74 indicators is displayed in Appendix 1.

Following the idea of Ananchotikul et al. (2010), the 74 indicators (questions) were classified into 1) the formal declaration of governance policies (Written Declaration - WD); and 2) information concerning the substantive implementation of each principle/policy (Substantive Implementation - SI). The classification process refers to the guidance in ACMF (2015) to judge whether the statement is categorized as WD or SI. Before categorizing into WD and SI, ten (10) questions referring to the principles that have been set as mandatory compliance by the Bapepam_LK (currently OJK) and the Indonesia Stock Exchange (IDX’s listing rules) were excluded. For instance, listed firms should have an audit committee with the independent commissioner as chairman of the committee and apply the two-tier board model (separation between the executive and supervisory boards). Moreover, three (3) reverse-type questions were also excluded to avoid misinterpretation. WD and SI identification and classification result in twenty- three (23) WD and thirty-eight (38) SI indicators. An Indonesian corporate governance expert reviewed and validated the classification of WD and SI to ensure consistency.

The expert came up with the same results as shown in Appendix 1.

Written Declaration Score (WDS)

The term Written Declaration (WD) indicates that firms have declared their Code of Ethics and other corporate governance policies available to the public. Having and disclosing the policies is deemed easy and inexpensive because it does not necessarily mean the firms implement them in practice. For example, a firm has a formal policy or charter regarding the nomination committee or Code of conduct. The process of identifying the questions in the scorecard results in 23 questions related to WD. The WD Score (WDS) for each company equals the number of yes answers divided by the total number of questions (23) times 100.

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Substantive Implementation Score (SIS)

Substantive implementation is any activities related to the actual implementation of a policy. The implementation in practice is much more costly than just policy declaration. For instance, recruiting independent board members, monitoring the compliance with the Code of ethics, or a minimum meeting frequency attended by the board. Installing a nomination committee is also considered expensive as this may burden companies with the committee fees. The identified questions in the scorecard related to SI are 38 items. The SI Score (SIS) for each company equals the number of yes answers divided by the total number of questions (38) times 100.

Decoupling Score (DS)

Decoupling is behavior in which firms have written policies formally while they avoid carrying out the policies substantively. As mentioned before that, all of the questions in RoB have equal weights; therefore, the DS calculation used in the paper also assumes that WD and SI questions have equal weights. To measure the decoupling behavior, it is simply the difference between SIS and WDS, i.e., (SIS minus WDS).

While the negative sign of DS means that firm tends only to adopt less costly written governance policies and fail to implement more costly governance policies, the positive sign indicates firms with good implementation.

3.3. Analysis Method

The research uses the descriptive method to describe and explain the data. Even though it is descriptive, the data are analyzed quantitatively using frequencies, percentages, and means. The data are classified by year, industry, and size. Another statistical analysis, such as a t-test, is also provided.

4. Results and Discussion 4.1. Descriptive Statistics

Table 1 displays the descriptive statistics of the variables used. The variables of interest are Written Declaration Score (WDS), Substantive Implementation Score (SIS),

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11 and more importantly, Decoupling Score (DS). The average value of WDS and SIS is 45.36 and 42.84, respectively. The first number indicates that, on average, firms only adopt ten formal written policies (out of 23) related to board mechanisms. In contrast, the second number explains that firms implement substantially 16 (out of 38) board mechanisms. The results imply that firms, on average, tend only to declare 45% of board governance policies and implement 43% of board governance mechanisms.

Based on the scorecard data provided by IICD, the policies that they do not have and disclose most are: the criteria used to assess the directors/commissioners; the board meeting scheduled before the start of the financial year; the term limit of nine years or less for the independent directors/commissioners; the role and responsibilities of the chairman; and the remuneration/fee structure for the executive directors as well as for the commissioners (non-executive directors).

Table 1.

Descriptive Statistics

Total (487 obs) Decoupling (279 obs = 57.3%) Non-decoupling (208 obs = 42.7%)

Variable Mean Mean Min Max Mean Min Max

WDS 45.36 55.52 13.04 100 31.73 8.70 91.30

SIS 42.84 46.56 7.89 94.74 37.85 10.53 92.11

DS -2.52 -8.97 -32.61 -0.11 6.12 0.11 30.78

ASSETS

(Rpbio) 61,300.79 78,370.92 464.37 1,038,706 38,403.85 696.82 801,984.20 MARKETCAP

(Rpbio) 42,130.74 48,219.23 1,450 437,356 33,963.96 46 445,498.20

ROA (%) 8.07 6.95 -34.66 87.63 9.56 -31.69 131.84

OPM (%) 22.90 21.94 -105.25 167.06 24.18 -38.10 426.59

DER (%) 233.87 264.99 0.02 2,818.71 192.12 0.04 2,042.97

Note :

The total sample is 487 firm-year observations. Decoupling Score (DS) equals Substantive Implementation Score (SIS) minus Written Declaration Score (WDS). The sample is split into two groups: decoupling firms and non-decoupling firms. Decoupling firms (279 observations) are firms with a negative sign of DS, while non-decoupling firms (208 observations) are firms with a positive sign of DS.

Board mechanisms that have not been implemented yet are such as a quorum requirement of at least 2/3 for board decisions; the assessment process of the directors/commissioners; annual performance assessment of individual

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director/commissioner; the submission of meeting materials to the board members at least five business days before the board meeting; the primary responsibility of the audit committee to propose the appointment of external auditors; and the independence of the chairman.

When comparing WDS and SIS, SIS is lower than WDS. The difference (DS) is - 2.52, meaning firms are inclined to endorse less costly written board governance policies but avoid implementing more costly ones. The paper's main point is decoupling behavior, which is the negative sign of DS. When the sample is split into decoupling firms (negative DS) and non-decoupling firms (positive DS), decoupling firms account for 57.3% (279 observations). For decoupling firms, on average, the gap between the WDS and the SIS is -8.97, with average assets of IDR78,371 billion and an average market capitalization of IDR48,219 billion.

On the other hand, non-decoupling firms have average assets and market capitalization much lower than decoupling firms. Concerning firm performance, decoupling firms are prone to have lower ROA and OPM than non-decoupling firms.

Moreover, decoupling firms have higher leverage (DER) than non-decoupling firms.

4.2. Decoupling by Industry

The industry category is classified into 9 (nine) sectors based on the Jakarta Stock Industrial Classification (Jasica) provided by the Indonesia Stock Exchange. The nine main sectors are (1) Agriculture, (2) Mining, (3) Basic Industry and Chemicals, (4) Miscellaneous Industry, (5) Consumer Goods Industry, (6) Property, Real Estate and Building Construction, (7) Infrastructure, Utilities, and Transportation, (8) Finance, (9) Trade, Service and Investment (IDX, 2016).

Table 2 shows the WDS, SIS, and negative DS scores from 2013 to 2017 across decoupling industries. In general, there has been a positive trend regarding policy adoption (WDS) and policy implementation (SIS) from 2013 to 2017, as shown in Graph 1. The discrepancy between WDS and SIS (Decoupling Scores) varies from year to year across industries. The highest scores of WDS (74.3) and SIS (67.7) belong to the financial industry. It can be explained that the financial industry is highly regulated

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13 and enforced; therefore, it has to comply with stricter laws and regulations. On the other hand, the agriculture industry has the worst scores of WDS (40.0) and SIS (32.1), implying that the industry lags regarding policy adoption and actual implementation.

Table 2.

Time Series (Mean) by Industry

Year Agriculture Mining Basic Industry and Chemicals

WDS SIS DS WDS SIS DS WDS SIS DS

2013 42.03 27.19 -14.84 53.42 43.23 -10.18 31.52 23.68 -7.84 2014 34.78 25.44 -9.34 55.43 44.41 -11.03 39.13 29.47 -9.66 2015 31.88 26.32 -5.57 52.90 42.11 -10.79 39.13 31.58 -7.55 2016 44.93 42.11 -2.82 60.25 50.00 -10 .25 66.67 54.39 -12.28 2017 46.38 39.47 -6.90 79.35 66.45 -12.90 64.13 52.63 -11.50 All* 40.00 32.11 -7.89 58.56 47.70 -10.86 50.09 40.05 -10.05

Year Miscellaneous Industry Consumer Goods

Property, Real Estate, and Building Construction

2013 60.87 42.10 -18.76 46.38 31.58 -14.80 35.40 27.08 -8.34 2014 50.00 35.53 -14.47 42.03 28.95 -13.08 39.13 31.20 -7.93 2015 36.96 26.32 -10.64 47.83 42.98 -4.84 37.89 34.21 -3.68 2016 67.39 53.95 -13.44 40.22 34.87 -5.35 48.55 39.69 -8.86 2017 73.91 71.05 -2.86 71.01 62.28 -8.73 58.39 50.00 -8.39 All* 55.43 43.09 -12.34 48.91 39.80 -9.11 44.46 36.84 -7.61 Year

Infrastructure, Utilities, and

Transportation Finance

Trade, Service, and Investment

2013 60.14 49.56 -10.58 62.17 54.21 -7.96 33.78 24.70 -9.08 2014 49.28 41.67 -7.61 73.58 63.97 -9.61 45.34 34.59 -10.76 2015 60.87 52.19 -8.68 71.74 66.32 -5.42 42.93 33.55 -9.38 2016 57.39 47.89 -9.50 80.87 75.00 -5.87 52.90 43.86 -9.04 2017 69.57 54.93 -14.63 79.89 75.33 -4.56 59.13 47.63 -11.50

All* 59.78 49.41 -10.37 74.28 67.66 -6.62 46.52 36.68 -9.84

*All = average score from 2013-2017

In terms of DS, the nine industries have negative decoupling scores. On average, companies in all industries provide evidence of symbolic governance practice rather than substantive implementation during the five years. The results are similar to the

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finding of Ananchotikul et al. (2010), what they call 'talk-only firms', i.e., firms are good at declaring governance policies. However, at the same time, they are poor in implementing costly policies. The results also align with legitimacy reasons wherein firms are more likely to declare their compliance without actual implementation (Krenn, 2015; Akkermans et al., 2007; Fiss & Zajac, 2006; MacLean & Behnam, 2010). In other words, the firms show the behavior of mimetic isomorphism as they just copy what other firms do as their benchmark.

Graph 1.

WDS, SIS, DS (Mean) by Year and Industry

We can see from Table 2 that the worst decoupling industry goes to the miscellaneous industry (such as automotive and textile) with the decoupling score of - 12.3 (average score from 2013-2017), while the financial industry has the highest decoupling score of -6.62 (less decoupling industry). As said earlier, the financial industry (mostly banking in the sample) has better implementation than non-financial

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15 because the nature of the industry is highly regulated. The comparison between the two industries is described in section 4.3.

Cost consideration might be why the firms are reluctant to implement the board mechanisms (Verhezen & Raby, 2019). The firms may think that as long as there are no penalties or sanctions from the enforcer or regulator, they feel safe. Given that Indonesia applies the civil law system and is regarded as a country with weak enforcement of the law (Oehmichen, 2018; Zattoni & Cuomo, 2008), it is argued that the decoupling practices would always occur sustainably.

Table 3.

The Worst Areas by Industry

No. Industry The three worst areas

- The Board did not review the vision and mission/strategy in the last financial year.

1. Agriculture - The company did not require a minimum quorum of at least 75% of all the meetings held during the year.

- The chairman was not an independent commissioner.

- The company did not require a minimum quorum of at least 2/3 for board decisions.

2. Mining - The company did not disclose the process followed in conducting the director/commissioner assessment.

- The remuneration committee did not comprise a majority of independent directors/commissioners.

3. Basic Industry and Chemicals

- Board papers for the board directors/commissioners meetings were not provided to the board at least five business days in advance of the board meeting.

- The company did not disclose the process followed in appointing new directors/commissioners.

- Independent commissioners did not makeup at least 50% of the board of commissioners.

4. Miscellaneous Industry

- The remuneration committee did not comprise a majority of independent directors/commissioners.

- The company did not disclose the process followed in conducting the director/commissioner assessment.

5. Consumer Goods

- An annual performance assessment was not conducted by an individual director/commissioner.

[Continued]

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No. Industry The three worst areas

- Board papers for the board directors/commissioners meetings were not provided to the board at least five business days in advance of the board meeting?

6. Property, Real Estate, and Building Construction

- The company did not disclose how the board of directors/commissioners plans for the succession of the CEO/Managing Director/President and key management.

- The company did not require a minimum quorum of at least 2/3 for board decisions?

7. Infrastructure, Utilities, and Transportation

- Board papers for the board directors/commissioners meetings were not provided to the board at least five business days in advance of the board meeting?

8. Finance - The company did not disclose the process followed in conducting the director/commissioner assessment.

- The audit committee did not have primary responsibility for recommendation on the appointment and removal of the external auditor.

9. Trade,

Service, and Investment

- The Board did not review the vision and mission/strategy in the last financial year.

In general, the board mechanisms that Indonesian firms did not implement most were such as the requirement to set a minimum quorum of 2/3 for board decisions, the submission of board papers in advance before the board meeting, the disclosure of the process followed in conducting the director/commissioner assessment, and the independence requirements. It is hard or even expensive for the firms to meet the ASEAN Corporate Governance Scorecard recommendations. The detail of the areas of concern can be seen in Table 3.

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17 4.3. Financial versus Non-Financial

Table 4 displays decoupling firms in the financial sector and non-financial sector.

It shows that the WDS and SIS of financial firms (banking) are significantly higher than non-financial firms (the t-test is significant at 1%). Financial firms also have lower DS than non-financial firms. Nevertheless, the negative decoupling scores of both sectors indicate that they lack substantive implementation.

For other variables, total assets, market capitalization, operating profit margin, and leverage for banking are significantly higher than non-financial firms. However, return on assets for banking is significantly lower than non-financial firms.

Table 4.

Financial and Non-financial Comparison

Financial

(59 obs)

Non-financial (220 obs)

t-test Total (279 0bs)

Variable Mean Mean Mean Mean

WDS 74.28 50.49 0.000^*** 55.52

SIS 67.67 40.90 0.000^*** 46.56

DS -6.62 -9.60 0.001^*** -8.97

ASSETS (Rpbio) 258,549.20 30,050.39 0.000^*** 78,370.92 MARKETCAP (Rpbio) 69,549.66 42,498.80 0.029^** 48,219.23

ROA 1.46 8.42 0.000^*** 6.95

OPM 25.53 20.98 0.076^* 21.94

DER 690.64 150.84 0.000^*** 264.99

*significant at 10%, ^**significant at 5%, ^***significant at 1%

5. Conclusion, Implication, and Limitation

The research uses institutional theory, which is more relevant to code compliance than agency theory. While agency theory does not consider institutional factors, the institutional theory asserts that different institutional environments affect the effectiveness of governance implementation (Oehmichen, 2018; Aguilera & Cuervo- Cazurra, 2009, Aguilera & Jackson, 2003).

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The study applies a descriptive quantitative method to explain and analyze the findings/results. The sample consists of 487 firm-year observations having the ASEAN Corporate Governance Scorecard (ACGS) for 2013-2017. The research shows that Indonesian firms only adopt the codes/regulations symbolically but do not substantially implement board mechanisms. Costs to implement might be the reason why the firms behave such that. The firms’ motivation is to gain legitimacy by adopting formal policies of board governance mechanisms, but at the same time, they tend not fully to implement the board mechanisms. Fifty-seven percent (279 out of 487 observations) in the sample show decoupling behavior. Decoupling behavior is more pronounced in large firms with lower performance and higher leverage.

Furthermore, firms in the miscellaneous industry (automotive and textile) decouple worst compared to the other eight industries. On the other hand, the financial (banking) industry shows the lowest level of decoupling. It can be explained that the financial sector faces much more stringent regulations to comply with. Law enforcement in the financial sector is also much tighter than other sectors. In general, the findings are in line with previous research which investigated decoupling behavior (e.g., Krenn, 2015;

Krenn, 2014; Fotaki et al., 2015; Ananchotikul et al., 2010; MacLean & Behnam, 2010;

Akkermans et al., 2007).

It is good to have governance policies as a necessary condition; however, they are insufficient. Firms are strongly encouraged to realize policies in action. Even though there has been improvement in the board governance implementation, the research findings imply that the board governance practices in Indonesia need to be improved.

For instance, the assessment process of the executive directors and the supervisory board members, the independence of the chairman (president commissioners), and the audit committee's responsibility.

The study has two limitations. First, the sample is primarily large firms (top 100 market capitalization) which may be biased. The description of small firms cannot be captured in this study. Therefore, it would be interesting to examine small firms for the next research. Second, as the analyses are limited to descriptive explanation, the cause- and-effect relationship has not been explored, such as the effect on the probability of

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19 fraud or firm performance. Further research can investigate the effect of decoupling on earnings management or return on investment.

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Appendix 1.

Responsibilities of the Board Scorecard

No. 1. Board Duties and Responsibilities Written Declaration (WD)/

Substantive Implementation (SI) Clearly defined board responsibilities and corporate

governance policy

1 1.1 Does the company disclose its corporate governance policy/board charter?

WD – (1) 2 1.2 Are the types of decisions requiring the board of

directors/commissioners' approval disclosed?

WD – (2) 3 1.3 Are the roles and responsibilities of the board of

directors/commissioners clearly stated?

WD – (3) Corporate Vision/Mission

4 1.4 Does the company have a vision and mission statement?

WD – (4) 5 1.5 Has the board reviewed the vision and

mission/strategy in the last financial year?

SI – (1) 6 1.6 Does the board of directors monitor/oversee the

implementation of the corporate strategy?

SI – (2) 2. Board structure

Code of Ethics or Conduct

7 2.1 Are the details of the Code of ethics or conduct disclosed?

WD – (5) 8 2.2 Does the company disclose that all

directors/commissioners, senior management, and employees are required to comply with the Code?

WD – (6)

9 2.3 Does the company disclose how it implements and monitors compliance with the Code of ethics or conduct?

SI – (3)

Board Structure & Composition

10 2.4 Do independent directors/commissioners make up at least 50% of the board of

directors/commissioners?

SI – (4)

11 2.5 Are the independent directors/commissioners independent of management and major/

substantial shareholders?

SI – (5)

12 2.6 Does the company have a term limit of nine years or less for its independent

directors/commissioners?

WD – (7)

13 2.7 Has the company set a limit of five board seats that an individual independent/non-executive director/commissioner may hold simultaneously?

WD – (8)

14 2.8 Does the company have any executive directors who serve on more than two boards of listed companies outside the group?

Excluded: reverse question (1)

Nominating Committee

15 2.9 Does the company have a Nominating Committee (NC)?

SI – (6) 16 2.10 Does the Nominating Committee comprise a

majority of independent directors/commissioners?

SI – (7) 17 2.11 Is the chairman of the Nominating Committee an

independent director/commissioner?

SI – (8) [continued}

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No. 1. Board Duties and Responsibilities Written Declaration (WD)/

Substantive Implementation (SI) 18 2.12 Does the company disclose the terms of reference/

governance structure/charter of the Nominating Committee?

WD – (9)

19 2.13 Did the Nominating Committee meet at least twice during the year?

SI – (9) Remuneration Committee/ Compensation Committee

20 2.14 Is the attendance of members at Nominating Committee meetings disclosed?

WD – (10) 21 2.15 Does the company have a Remuneration

Committee?

SI – (10) 22 2.16 Does the Remuneration Committee comprise a

majority of independent directors/commissioners?

SI – (11) 23 2.17 Is the chairman of the Remuneration Committee

an independent director/commissioner?

SI – (12) 24 2.18 Does the company disclose the terms of reference/

governance structure/ charter of the Remuneration Committee?

WD – (11)

25 2.19 Did the Remuneration Committee meet at least twice during the year?

SI – (13) 26 2.20 Is the attendance of members at Remuneration

Committee meetings disclosed?

WD – (12)

27 2.21 Does the company have an Audit Committee? Excluded: mandatory compliance 28 2.22 Does the Audit Committee comprise entirely of

non-executive directors/commissioners with a majority of independent directors/commissioners?

SI – (14)

29 2.23 Is the chairman of the Audit Committee an independent director/commissioner?

Excluded: mandatory compliance 30 2.24 Does the company disclose the terms of

reference/governance structure/charter of the Audit Committee?

Excluded: mandatory compliance

31 2.25 Does the Annual Report disclose the profile or qualifications of the Audit Committee members?

Excluded: mandatory compliance 32 2.26 Does at least one of the independent

directors/commissioners of the committee have accounting expertise (accounting qualification or experience)?

Excluded: mandatory compliance

33 2.27 Did the Audit Committee meet at least four times during the year?

Excluded: mandatory compliance 34 2.28 Is the attendance of members at Audit Committee

meetings disclosed?

WD – (13) 35 2.29 Does the Audit Committee have primary

responsibility for recommendation on the appointment and removal of the external auditor?

SI – (15)

3. Board Processes

Board meetings and attendance

36 3.1 Is the Board of directors meeting scheduled before the start of the financial year?

WD – (14) 37 3.2 Does the board of directors/commissioners meet at

least six times during the year?

SI – (16)

[continued]