Board quality and the performance of Indonesian listed companies

Abstract

This paper provides an analysis on the effect of board quality on company performance. Using a sample of 133 companies listed on the Jakarta Stock Exchange in the year 2007, this study specifically examines whether multiple directorships, director shareholding and board independence (i.e. proxies for board quality) can be associated with company financial performance. This study also investigates the effect of audit committee characteristics (as proxied by audit committee independence and financial expertise) on company performance, while controlling for the effects of leverage and size. With regard to board quality, the results indicate that only board independence is found to be associated with performance, though in the opposite direction. The direction of influence suggests that having too many independent directors (i.e. non-executive) might slow down the business as they might have a lack of detailed knowledge about the company's business, and are more concerned about their gatekeeper role. As expected, leverage and size are found to have a significant influence on company performance.