Strengthen the application of Good Corporate Governance

Oct 13, 2025 by windailys.com 114 views

The Effect of Application of Good Corporate Governance on Financial Performance with Profit Management as Intervening Variables

Abstract

Good Corporate Governance (GCG) is a system that regulates and manages a company to create added value to shareholders and other stakeholders. This study aims to find out whether the application of GCG affects financial performance through earnings management as an intervening variable in banking companies listed on the Indonesia Stock Exchange. The results show that the application of GCG as a whole has a significant influence on financial performance, but not all GCG elements have the same impact. The size of the council, for example, does not affect financial performance. However, the audit committee plays a crucial role in ensuring that earnings management is carried out in a way that does not harm shareholders and other stakeholders.

Introduction

Good Corporate Governance (GCG) is a system that regulates and manages a company to create added value to shareholders and other stakeholders. In the context of banking companies, the application of GCG is very important because it is directly related to the level of customer confidence and financial stability. The application of a good GCG can increase transparency and accountability, which in turn can have a positive impact on financial performance. Financial performance is measured through several indicators, such as profitability, liquidity, and asset growth. With a good GCG, companies are expected to be able to manage their resources efficiently and effectively.

Literature Review

Good Corporate Governance is a system that regulates and manages a company to create added value to shareholders and other stakeholders. The application of GCG is very important in banking companies because it is directly related to the level of customer confidence and financial stability. The application of a good GCG can increase transparency and accountability, which in turn can have a positive impact on financial performance. Financial performance is measured through several indicators, such as profitability, liquidity, and asset growth. With a good GCG, companies are expected to be able to manage their resources efficiently and effectively.

Methodology

This study involved 41 registered banking companies, and by using the Purposive Sampling method, 30 companies were selected based on certain criteria. The data analyzed included observations from 2011 to 2013, produced a total of 90 observations that became the sample in this study. To test the hypothesis, linear regression analysis is used.

Analysis of Good Corporate Governance and Financial Performance

Good Corporate Governance is a system that regulates and manages a company to create added value to shareholders and other stakeholders. In the context of banking companies, the application of GCG is very important because it is directly related to the level of customer confidence and financial stability. The application of a good GCG can increase transparency and accountability, which in turn can have a positive impact on financial performance. Financial performance is measured through several indicators, such as profitability, liquidity, and asset growth. With a good GCG, companies are expected to be able to manage their resources efficiently and effectively.

The results of hypothesis testing show that the application of good corporate governance, which is measured through directors' ownership, institutional ownership, council size, the proportion of independent councils, and audit committees, has no partial and simultaneous influence on earnings management. However, the application of GCG as a whole has a significant influence on financial performance. However, when analyzed separately, only the size of the council does not affect financial performance.

Profit Management as Intervening Variable

Profit management functions as a company's strategy to influence their financial statements for certain purposes, often to meet market expectations or maintain the company's image. In the context of this research, earnings management functions as an intervening variable between the application of GCG and financial performance.

The results show that although earnings management does not show direct effects of GCG on financial performance, significant effects remain when viewed from the perspective of the Audit Committee. This indicates the importance of the role of the audit committee in ensuring that earnings management is carried out in a way that does not harm shareholders and other stakeholders. The audit committee that functions well can help prevent unethical earnings management practices, thus encouraging better financial performance.

Conclusion

From the results of this study, it is clear that the application of Good Corporate Governance plays an important role in influencing the financial performance of banking companies listed on the Indonesia Stock Exchange. Although not all aspects of GCG show a direct effect on earnings management and financial performance, the application of GCG as a whole still contributes positively. Therefore, companies need to continue to strengthen the application of GCG to improve financial performance and maintain stakeholder trust. Strict supervision from the audit committee is also the key in ensuring that earnings management practices are carried out with correct ethics in order to maintain the integrity of financial statements.

Recommendation

Based on the results of this study, the following recommendations are made:

Strengthen the application of Good Corporate Governance: Companies need to continue to strengthen the application of GCG to improve financial performance and maintain stakeholder trust.
Improve the role of the audit committee: The audit committee plays a crucial role in ensuring that earnings management is carried out in a way that does not harm shareholders and other stakeholders. Therefore, companies need to improve the role of the audit committee to ensure that it functions effectively.
Increase transparency and accountability: The application of a good GCG can increase transparency and accountability, which in turn can have a positive impact on financial performance. Therefore, companies need to increase transparency and accountability to improve financial performance.

Limitation of the Study

This study has several limitations, including:

Sample size: The sample size of this study is limited to 30 companies.
Data analysis: The data analysis of this study is limited to linear regression analysis.
Time period: The time period of this study is limited to 2011 to 2013.

Future Research Directions

This study provides several future research directions, including:

Investigating the effect of GCG on financial performance in other industries: This study only investigates the effect of GCG on financial performance in the banking industry. Therefore, future research can investigate the effect of GCG on financial performance in other industries.
Investigating the role of the audit committee in ensuring that earnings management is carried out in a way that does not harm shareholders and other stakeholders: This study shows that the audit committee plays a crucial role in ensuring that earnings management is carried out in a way that does not harm shareholders and other stakeholders. Therefore, future research can investigate the role of the audit committee in ensuring that earnings management is carried out in a way that does not harm shareholders and other stakeholders.

Conclusion

In conclusion, this study shows that the application of Good Corporate Governance plays an important role in influencing the financial performance of banking companies listed on the Indonesia Stock Exchange. Although not all aspects of GCG show a direct effect on earnings management and financial performance, the application of GCG as a whole still contributes positively. Therefore, companies need to continue to strengthen the application of GCG to improve financial performance and maintain stakeholder trust. Strict supervision from the audit committee is also the key in ensuring that earnings management practices are carried out with correct ethics in order to maintain the integrity of financial statements.
Q&A: Effect of Application of Good Corporate Governance on Financial Performance

Q: What is Good Corporate Governance (GCG)?

A: Good Corporate Governance (GCG) is a system that regulates and manages a company to create added value to shareholders and other stakeholders. It is a set of principles and practices that ensure the company is managed in a transparent, accountable, and responsible manner.

Q: Why is GCG important in banking companies?

A: GCG is important in banking companies because it is directly related to the level of customer confidence and financial stability. The application of a good GCG can increase transparency and accountability, which in turn can have a positive impact on financial performance.

Q: What is the role of the audit committee in ensuring that earnings management is carried out in a way that does not harm shareholders and other stakeholders?

A: The audit committee plays a crucial role in ensuring that earnings management is carried out in a way that does not harm shareholders and other stakeholders. It is responsible for reviewing and approving the company's financial statements, as well as ensuring that the company's financial reporting is accurate and transparent.

Q: What are the benefits of implementing GCG in a company?

A: The benefits of implementing GCG in a company include:

Increased transparency and accountability
Improved financial performance
Enhanced stakeholder trust
Better risk management
Improved corporate reputation

Q: What are the challenges of implementing GCG in a company?

A: The challenges of implementing GCG in a company include:

Resistance to change from existing management and employees
Lack of resources and expertise
Difficulty in measuring and evaluating the effectiveness of GCG
Conflicting priorities and interests among stakeholders

Q: How can companies measure the effectiveness of GCG?

A: Companies can measure the effectiveness of GCG by:

Conducting regular audits and reviews of financial statements
Implementing a system of internal controls and risk management
Establishing a code of conduct and ethics
Providing training and development programs for employees
Conducting regular surveys and feedback sessions with stakeholders

Q: What are the consequences of not implementing GCG in a company?

A: The consequences of not implementing GCG in a company include:

Loss of stakeholder trust and confidence
Decreased financial performance and profitability
Increased risk of financial and reputational damage
Difficulty in attracting and retaining top talent
Increased regulatory and compliance risks

Q: How can companies ensure that their GCG practices are aligned with international best practices?

A: Companies can ensure that their GCG practices are aligned with international best practices by:

Conducting regular reviews and assessments of their GCG practices
Implementing a system of continuous improvement and learning
Seeking guidance and advice from international experts and organizations
Participating in industry-wide initiatives and benchmarking studies
Establishing a culture of transparency and accountability

Q: What is the role of the board of directors in ensuring that GCG practices are implemented effectively?

A: The board of directors plays a crucial role in ensuring that GCG practices are implemented effectively. It is responsible for:

Establishing and overseeing the company's GCG policies and procedures
Appointing and overseeing the audit committee and other GCG-related committees
Reviewing and approving the company's financial statements and reports
Ensuring that the company's GCG practices are aligned with international best practices

Q: How can companies ensure that their GCG practices are communicated effectively to stakeholders?

A: Companies can ensure that their GCG practices are communicated effectively to stakeholders by:

Establishing a clear and transparent communication strategy
Providing regular updates and reports on GCG practices and performance
Engaging with stakeholders through regular surveys and feedback sessions
Establishing a culture of transparency and accountability
Providing training and development programs for employees on GCG practices and communication.