Politically connected independent board and firm performance

Abstract

This research examines the relationship between politically connected independent commissioners and independent directors on firm performance. The sample are all listed companies on the Indonesia Stock Exchange (IDX) from 2010–2017. In this study, we employ the ordinary least squares (OLS) regression model and Heckman’s 2SLS test to handle the problem of endogeneity. We document that politically connected independent commissioners did not affect the firm performance. On the contrary, politically connected independent commissioners had a negative relationship to firm performance; this was due to the appointment of independent commissioners and independent directors not based on expertise and knowledge in the financial and managerial company field, based solely on previous work experience. Moreover, our result is robust to the Heckman 2SLS test. Therefore, the result is expected to give insight for public firms and policy regulators, to avoid misunderstandings in decision-making at company owners and management levels.

Keywords:

• Political connections
• firm performance
• independent board
• independent commissioners
• independent directors

JEL Classification:

• M40
• M41
• M48

Public interest statement

This article analyzes the relationship between independent commissioners and independent directors with political connections that affect the financial performance of public companies in Indonesia. This research is very important because little literature discusses the effectiveness of the positions of independent commissioners and directors who have political links in generating good financial performance. The study results found that politically connected independent commissioners had no relationship with company performance. In contrast, politically connected independent directors are negatively correlated with firm performance. These results provide input to the owners and managers of the company so that in appointing independent commissioners and independent directors, not only look at the work experience and political power owned by independent commissioners and independent directors but also need to consider expertise and knowledge, especially in the field of management and company finance for the company’s sustainability. Furthermore, this study could give insight into the issue of political connection in a firm’s top management, since the political connection is quite common in Indonesia.

Acknowledgment

We express gratitude to Ministry of Education, Culture, Research, and Technology of Republic of ‎Indonesia for the grant given to fund this research.‎

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

The author(s) reported there isfunding associated with the work featured in this article from the Ministry of Education, Culture, Research, and Technology of Republic of Indonesia

Notes on contributors

Onong Junus

Onong Junus is a doctoral student in the accounting doctoral program at Universitas Airlangga and a lecturer at the economics faculty of the University of Gorontalo.

Mohammad Nasih

Mohammad Nasih is a professor of accounting at the accounting department, Faculty of Economics and Business, Universitas Airlangga. He holds a doctorate from Airlangga University and a master’s degree from Airlangga University. Research interest: financial accounting

Muslich Anshori

Muslich Anshori is a professor in accounting, at the accounting department of the Faculty of Economics and Business, Universitas Airlangga. He holds a doctorate from Airlangga University and a master’s degree from the Bandung Institute of Technology. Interested research: Accounting, Management, and Islamic Accounting.

Iman Harymawan

Iman Harymawan is a chief of Airlangga Global Engagement and a lecturer of accounting in Universitas Airlangga, Indonesia. He obtained his Ph.D. from The City University of Hong Kong and obtained MBA from National Chen Kung University. Research Interest: political and military connections in business.