Does the Role of Board Commissioners Can Increase Executive Compensation and Company Financial Performance in Indonesia Commercial Banking?

Authors

  • Eriana Kartadjumena *, Waymond Rodgers

Abstract

This study investigates whether the board of commissioners (BoCs) role in Indonesia commercial
banks could shape the motivation of the top management or executives to achieve company goals of higher
company financial performance in a concentrated ownership dominant context. This study analyses data
from 252 firm-year observations as a new unbalanced data panel from the population of 39 Indonesia
commercial banks listed in the Indonesia Stock Exchange for the period 2007-2014. This study implemented
a decision-making framework model, specifically the Throughput Model, which considers the concepts of
perception (P), information (I), and judgment (J) in the decision making process (D). This study found
reveals that of the BoCs role in two-tier corporate governance (CG) systems promotes higher payment in
executive compensation and better company financial performance. This study also found that the
concentrated ownership structure has strengthened the positive relationship between the BoCs role and
executive compensation in order to increase company financial health and market value performance. The
role of the BoC in a concentrated ownership structure context could not provide effective protection of
shareholders (large ownership) and other stakeholders (minority ownership) from the expropriation
behaviour of managers through excessive of their compensation. This study reveals that those mechanisms
are important mechanisms in making a company's decision not only to align shareholders’ interests
(according to the agency theoretic pathway) but also for broader stakeholders’ interests (according to
stakeholders’ pathway) to increase both companies financial health and market value performance. This
study provides lessons from the past for decision makers in understanding the stakeholders' concern of the
role of BoCs that is vital to understand corporate behaviour to set up policy in order to regulate corporate
activities, determine objectives and choose the strategies in a concentrated ownership dominant context.

Published

2020-10-15

Issue

Section

Articles