The purpose of this research is to investigate the influence of board size on the financial performance of firms listed on the Indonesian Stock Exchange from 2014 to 2018. The research method uses multiple linear regression. The firm performance is measured with return on assets (ROA). The research result shows that board size does not significantly influence the firm performance. Therefore, it is implied that board size of listed firms in Indonesia is not proven either to improve or worsen the firm performance. This research is particularly important to the firms and their shareholders in Indonesia and other developing economies since it contributes to a better understanding of board size – firm performance relationship

Jalaluddin, Jalaluddin

Juanda, Juanda

English

The purpose of this research is to investigate the influence of board size on the financial performance of firms listed on the Indonesian Stock Exchange from 2014 to 2018. The research method uses multiple linear regression. The firm performance is measured with return on assets (ROA). The research result shows that board size does not significantly influence the firm performance. Therefore, it is implied that board size of listed firms in Indonesia is not proven either to improve or worsen the firm performance. This research is particularly important to the firms and their shareholders in Indonesia and other developing economies since it contributes to a better understanding of board size â€“ firm performance relationship

eJournal FEB Unmul (Fakultas Ekonomi dan Bisnis Universitas Mulawarman) / Journals of Economics and Business Mulawarman (JEBM)

 JURNAL MANAJEMEN - VOL. 13 (2) 2021, 292-296 journal.feb.unmul.ac.id/index.php/JURNALMANAJEMEN   Copyright@2021; Jurnal Manajemen - pISSN: 0285-6911 - eISSN: 2528-1518 292  Board size and firm performance of listed companies in Indonesia  Juanda1*, Jalaluddin2 Universitas Syiah Kuala, Banda Aceh. *Email: juanda@fe.unsyiah.ac.id  Abstract The purpose of this research is to investigate the influence of board size on the financial performance of firms listed on the Indonesian Stock Exchange from 2014 to 2018. The research method uses multiple linear regression. The firm performance is measured with return on assets (ROA). The research result shows that board size does not significantly influence the firm performance. Therefore, it is implied that board size of listed firms in Indonesia is not proven either to  improve or worsen the firm performance. This research is particularly important to the firms and t heir shareholders in Indonesia and other developing economies since it contributes to a better understanding of board size – firm performance relationship. Keywords: Board of commissioners; board of directors; return on assets  Board size and firm performance of listed companies in Indonesia; Juanda, Jalaluddin  Copyright@2021; Jurnal Manajemen - pISSN: 0285-6911 - eISSN: 2528-1518 293  INTRODUCTION A good and competent management and supervision are crucial for companies in achieving their goals. Both board of directors and board of commissioners should cooperate intensively so that the goal achievements can be guaranteed. Nevertheless, the work of directors and commissioners occasionally is not performed as expected. It is presumed that the board size may improve or hinder the companies’ goal achievements. Therefore, the researchers are interested to investigate the influence of board size on  firm performance, particularly of listed companies in Indonesia. The objective of this research is to investigate the influence of board size on firm per formance in Indonesia. The organization of this paper is structured as follows. Section 2 presents the literature review on board of directors and commissioners in Indonesia and the relationship between board size and firm performance. Section 3 describes the research method. Section 4 presents the discussion of the findings, and Section 5 concludes. Literature review Indonesia adopts the two-tier board structure, comprised of the board of commissioners (BoC) and board of directors (BoD). The two-tier board structure is common in civil law countries (e.g. Netherlands, Germany, and many countries in Eastern Europe) whereas Anglo-Saxon countries (e.g. the United States, United Kingdom, and Australia) adopt the one-tier or unitary board structure (International Finance Corporation, 2018). The responsibility of BoC is to oversee and advise the BoD in order to  ensure that the latter pursues the interest and objectives of the company. According to the Indonesia’s code of corporate governance, the responsibilities of a BoC must be performed with integrity, and it has to  ensure the compliance of the company’s activities with legal requirements. The role of BoC in two -tier board structure is similar to that of non-executive directors in one-tier structure (International Finance Corporation, 2018). On the other hand, the responsibility on day-to-day management at companies in Indonesia lies on the hand of the BoD. The general meeting of shareholders is also set up by the BoD every year (International Finance Corporation, 2018). Indonesia’s Code of Corporate Governance (2006) determines that both BoC and BoD have mutual responsibility that shall be reflected in: Internal control and risk management implemented effectively and efficiently; Return for shareholders achieved optimally; Interest of stakeholders protected properly; Sustainability of organisation management ensured through succession conducted fairly and properly.  In addition, the Code also recommends that both BoC and BoD shall reach an agreement on: A long term and annual plan, strategy, and budget; The policy required to ensure that laws and regulations and articles of association are being adhered to  and conflict of interests is avoided. Performance evaluation policy and method for the company, its units and personnel; A structure of organization one level under the BoD at most, so the vision, mission, and values of the company can be supported for achievement. Most studies on the relationship between board size and firm performance conclude a negative impact from the former on the latter. Jensen (1993) and Lipton and Lorsch (1992) opposed the idea of large board because it is less effective and makes CEO control the board easier. Guest (2009) found that board size negatively impacted profitability, Tobin’s Q, and share return of companies in  the United Kingdom. This was caused by poor communication and decision-making normally occurred in  large boards. Similarly in the context of India, board size is inversely associated with firm performance and boards with smaller size have more efficiency than the larger ones (Garg, 2007).  O’Connell and Cramer (2010) found that board size was negatively associated with firm performance for listed companies in Ireland.  JURNAL MANAJEMEN - VOL. 13 (2) 2021, 292-296  Copyright@2021; Jurnal Manajemen - pISSN: 0285-6911 - eISSN: 2528-1518 294  The study conducted by Eisenberg et al. (1998) concluded that board size negatively correlated with profitability in small and midsize firms in Finland. On the contrary, Larmou and Vafeas (2010) argued that large boards were apparently to be positively related with shareholder value of smaller firms with a history of poor operating performance. METHOD This study employs quantitative approach, namely statistical associative method. In order to  investigate the influence of board size on firm performance of listed companies in  Indonesia, the multiple linear regression is utilized where dependent variable is firm performance and independent variables are the size of board commissioners and board of directors. Data, variables and characteristics of sample The population in this study is 192 industrial and manufacturing companies listed on the Indonesia Stock Exchange. Of the 192 companies, 32 meet the sampling criteria and hence taken as samples. The sampling criteria are as follows: Listed on the Indonesia Stock Exchange since or prior to 2 January 2014 and remain listed until 31 December 2018; Have complete information required in this research; Financial period ends at 31 December from 2014 to 2018; and Have changed the board size during the observation period.  The sample size is considerably small due to the fact that many industrial and manufacturing companies listed on the Indonesia Stock Exchange from 2014 to 2018 did not change their board size . Hence, such firms have to be removed from the samples. In this paper, firm performance is measured with return on assets (ROA). Board size is measured with the amount of commissioners and directors.  The required data are collated from online financial database namely Orbis and analysed using a software package for statistical analysis. Regression model The following model is used to investigate the influence of board size on firm performance of listed companies in Indonesia: ROA = ß0 + ß1BOC + ß2BOD + ε Where: ROA = return on assets BOC = size of board of commissioners BOD = size of board of directors RESULT AND DISCUSSION  The empirical results of this research are presented and discussed in  this section. First,  the average values of ROA and board size of listed companies in Indonesia are shown as follows: Table 1. Average values of ROA and Board Size of the Samples No. Variables Average Values 1. Return on Assets 4.61% 2. Size of Board of Commissioners  4.99 3. Size of Board of Directors 5.80 Return on assets The average ROA of sampled firms in this research is 4.61 between 2014 and 2018. The lowest level of ROA was reached in 2017 (3.09%) and it reached its peak in 2018 (7.24%). Size of board of commissioners On average, the sampled firms have 4.99 persons sitting in board of commissioners during the observation period. 2014 records the largest size of the board (5.28 persons) and it shrank to the lowest of 4.81 persons in 2018. Board size and firm performance of listed companies in Indonesia; Juanda, Jalaluddin  Copyright@2021; Jurnal Manajemen - pISSN: 0285-6911 - eISSN: 2528-1518 295  Size of board of directors The size of board of directors in this research is not significantly different with the size of board of commissioners. The number of directors is 5.8 persons on average. Similar to board of commissioners, the highest average of directors number was reached in 2014 (6 persons) while its lowest level occurred in 2018 (5.53 persons). Relationship between the Size of Board of Commissioners and ROA The relationship between the number of commissioners and ROA of the sampled firms is shown in the following table: Table 2. Regression result of the relationship between ROA and board size Dependent Variable: ROA   Method: Panel EGLS (Cross-section random effects) Date: 08/28/20   Time: 14:15   Sample: 2014 2018   Periods included: 5   Cross-sections included: 32   Total panel (balanced) observations: 160  Swamy and Arora estimator of component variances Variable Coefficient Std. Error t-Statistic Prob.   BOC -0.137792 0.580681 -0.237294 0.8127 BOD 0.071562 0.540323 0.132442 0.8948 C 4.878575 3.928942 1.241702 0.2162  Weighted Statistics   Root MSE 8.083221     R-squared 0.000371 Mean dependent var 1.657504     Adjusted R-squared -0.012363 S.D. dependent var 8.110105     S.E. of regression 8.160084 Sum squared resid 10454.15     F-statistic 0.029133 Durbin-Watson stat 1.549942     Prob(F-statistic) 0.971292 Based on the tables above, the research model equation is as follows. ROA = 4.88 – 0.14BOC + 0.07BOD, where ROA: Return on Assets BOC: Board of Commissioners Size BOD: Board of Directors Size It can be seen from the table above that the p values of the size of board of commissioners and board of directors (0.8127 and 0.8948 respectively) are greater than α value (0.05). This means that the board size does not significantly influence the firm performance of industrial and manufacturing companies in Indonesia. In addition, the table also shows that the R-squared value is 0.000371  which means that only 0.04% of ROA variation can be explained by the board size and 99.96% of the variation is explained by other variables not employed in this research. Classical assumptions test This research utilizes the Generalized Least Square (GLS) with random effect, hence classical assumption test is not required (Gujarati & Porter, 2009). The decision to utilize GLS is made after conducting Chow Test, Hausman Test and Lagrange-Multiplier (LM) Model. These tests conclude that random effect is most suitable for this research, hence GLS is utilized. CONCLUSION This research investigates the influence of board size on firm performance in  industrial and manufacturing listed companies in Indonesia. The research finding reveals that neither the size of board of commissioners nor the size of board of directors significantly influences the firm performance. Therefore, it contradicts the findings of the scholars who found either positive (Larmou JURNAL MANAJEMEN - VOL. 13 (2) 2021, 292-296  Copyright@2021; Jurnal Manajemen - pISSN: 0285-6911 - eISSN: 2528-1518 296  and Vafeas, 2010) or negative (e.g. Jensen, 1993; Lipton & Lorsch, 1992; Guest, 2009) influence from board size. This finding also implies that the board size does not correlate with the quality of supervision by board of commissioners and direction by board of directors. Another important finding in this research is the extremely small R-Squared value which can be interpreted that board size plays no role in influencing the firm performance. This means that one may exclude board size from variables affecting firm performance. In  other words, board size may be disregarded when one wants to investigate the possible causes of change in firm performance. Some limitations and suggestions from this research are as follows: The sampled firms are taken only from one industry, namely industrial and manufacturing industry. In order to create a clearer and more comprehensive picture of the board size-firm performance relationship, it is suggested that future researchers also include samples from other industries in their research. The sample size is considerably small. In order to obtain a more robust and reliable result,  it is recommendable for future researchers to enlarge the sample size by selecting samples f rom other industries and/or obtain primary data from the research population. This research does not include the board independence as independent variables. It is possible that this variable is actually more influential to firm performance than board size, therefore adding this variable in a research model may improve the R-squared value. REFERENCES Eisenberg, T., Sundgren, S., and Wells, M.T. (1998) Larger board size and decreasing firm value in  small firms. Journal of Financial Economics, 48: 35-54 Garg, A.K. (2007) Influence of board size and independence and firm performance: a study of Indian companies. Vikalpa, 32 (3): 39-60 Guest, P.M. (2009) The impact of board size on firm performance: evidence from the UK. The European Journal of Finance, 15 (4): 385-404 Gujarati, D. and Porter, D. (2009) Basic Econometrics. 5th ed. New York: McGraw-Hill Irwin International Finance Corporation (2018). Indonesia Corporate Governance Manual, 2 n d edition . Washington, D.C.: IFC Jensen, M.C. (1993) The modern industrial revolution, exit, and the failure of internal control mechanisms. Journal of Finance, 48 (3): 831-880 Larmou, S. and Vafeas, N. (2010) The relation between board size and firm performance in firms with a history of poor operating performance. Journal of Management & Governance, 14: 61-85 Lipton, M. and Lorsch, J.W. (1992) A modest proposal for improved corporate governance. The Business Lawyer, 48 (1): 59-77 National Committee on Governance (2006) Indonesia’s Code of Good Corporate Governance . Jakarta: KNKG O’Connell, V. and Cramer, N. (2010) The relationship between firm performance and board characteristics in Ireland. European Management Journal, 28 (5): 387-399      

Board size and firm performance of listed companies in Indonesia

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Board size and firm performance of listed companies in Indonesia

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