2196-Article Text-8102-2-10-20231228

Almana : Jurnal Manajemen dan Bisnis
Volume 7, No. 3/ December 2023, p. 460-471

ISSN 2579-4892 print/ ISSN 2655-8327 online
DOI: 10.36555/almana.v7i3.2196
The Impact of Corporate Social Responsibility and Corporate Governance on

Firm Performance: A Study of ESG Quality 45 IDX-KEHATI
Fendy Cuandra*1, Hardy Winata Lie2

Universitas Internasional Batam, Indonesia*12
fendy.cuandra@uib.ac.id*1, 2041154.hardy@uib.edu2
Abstract: The KEHATI-listed companies have displayed commendable SRI

performance across financial metrics and transactional liquidity. Among these firms, PT
Danone Indonesia faced a Corporate Social Responsibility (CSR) issue in 2012 due to
the uneven distribution of benefits, which prompted community protests and
undermined the company's efficacy, ultimately impacting its performance. The
overarching objective of this study is to explore and comprehend the relationship
between CSR, corporate governance, and their potential impact on the performance of
ESG QUALITY 45 IDX KEHATI listed on the Indonesia Stock Exchange (IDX). The
study utilized panel regression analysis to analyze data collected over five years (2017-
2021) from IDX. The research implies that there is no substantial relationship between
corporate governance and performance. However, the findings evidence implies that
there is a strong negative relationship between CSR and ROE, while ROA remains
unaffected. In terms of control variables, the study found no significant correlation
between firm size and ROA and ROE, while leverage had shown a substantial negative
influence on both financial performance measures. This research sheds light on the
connection between CSR, corporate governance, and business performance.
Keywords: Corporate Governance; Corporate Social Responsibility; Firm Performance
INTRODUCTION
Public establishments in both developed and developing nations, including
Indonesia, constitute a significant portion of registered companies. As of now, the
Indonesia Stock Exchange (IDX) lists 759 public companies operating across various
sectors, such as manufacturing and finance. The IDX categorizes companies into two
primary segments: LQ45 and Kehati. LQ45 firms are distinguished by their high
liquidity, while Kehati comprises firms that prioritize Sustainable Responsible
Investment (SRI). The Kehati category consists of 45 companies that have
demonstrated good SRI performance based on financial and liquidity measurements.
The goal of the Kehati category is to provide investors with more options to select and
evaluate companies based on their future performance.
A company's aptitude to deliver positive growth is a key indicator of good
performance. Investors commonly use performance as a benchmark to evaluate
investment options and gauge the company's success (Matei et al., 2021). Conducting
an assessment of a company's performance is necessary to gain a current
understanding of its situation (Tania & Hesniati, 2022). Indicators of profitability, such
as Return on Asset (ROA) and Return on Equity (ROE), can be utilized as a
performance metric. ROA evaluates the skillfulness of management in producing
profits, while ROE assesses the company's performance and management's capacity
to deliver benefits to its shareholders (Darmawan, 2020).
Evaluating a company's performance involves assessing its CSR and corporate
governance, which directly impacts public trust (Sisca et al., 2022). CSR is essential for
meeting social obligations towards employees, the government, consumers, the
environment, and society. Neglecting CSR impedes growth, making it a mandatory
requirement for efficient operations. The journey toward CSR can significantly influence
a company's performance. Siregar & Safitri (2019) outlined three principles for CSR
Submitted: May 10, 2023; Revised: November 21, 2023;

Accepted: November 28, 2023; Published: December 28, 2023;
Website: http://journalfeb.unla.ac.id/index.php/almana/article/view/2196
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disclosure, namely sustainability, corporate responsibility, and transparent reporting

that accurately reflects the company's actions.
Companies worldwide are expected to implement CSR as a way of ensuring a
direct positive impact on the business environment. PT Danone Indonesia encountered
a CSR problem in 2012, with residents of the Polanharjo subdistrict protesting against
the uneven distribution of benefits. The head of the village expressed concern about
unequal distribution, and the company only distributed CSR to nearby villages, Wangen
and Kebonharjo. This was due to cost limitations and a lack of community education
about their operations, leading to a perception of unfairness among nearby
communities adversely affected by water shortages for farming and transportation.
The establishment of a company directly affects the activities of the surrounding
community. PT Danone Indonesia faced a lawsuit for violating local government
demands, leading to the implementation of new regulations and a CSR program to
improve their management experience in sustainable development programs. The
program had low acceptance in the 18 Polanharjo Klaten villages, but a meeting was
held with village leaders the latter offered feedback and opinions as representatives of
the village residents. According to Sindhutumo (2018), the program aims to introduce
social practices that facilitate communication between the company and nearby
communities, enhancing social interaction.
Effective corporate governance, which encompasses processes, tools, systems,
and regulations governing responsibilities, rights, authorities, and influences within a
company, can positively impact its performance. Organizations must ensure good
management in corporate governance, as it is responsible for investigating and
evaluating financial reports that affect company performance (Syofyan, 2021).
Measuring Board Size (BS) and BI (Board Independence) is essential for evaluating
corporate governance. BS is an indicator of the number of individuals serving as
directors on a company's board, which can affect its performance because directors
play a critical role in overseeing the company's activities. Additionally, board
independence, which comprises board members with no affiliation with the company, is
essential to enhance the quality of financial reports and enhance company
performance.
The governance structure of a company is comprised of several committees, with
one such committee being the Nomination and Remuneration Committee (NRC). The
committee is responsible for ensuring fair policies for compensation and nominations
and advising the company. It is regulated by The Financial Services Authority
Regulations (POJK) and is believed to positively impact company performance. The PT
Bank Negara Indonesia (BNI) case emphasizes aligning the committee with the
company's vision for optimal performance, aiming to be an independent and
professional board that adheres to transparent policies (Cintya, 2020). It is essential to
conduct extensive research to examine and comprehend the complex interplay
between CSR and corporate governance, as well as their potential impacts on the
performance of ESG QUALITY 45 IDX KEHATI listed on the IDX.
CSR is crucial for companies as it impacts public perception and a company's
responsibility toward society, which ultimately affects its performance (Sisca et al.,
2022). Indonesian law requires all companies to engage in CSR activities as outlined in
UU No. 19 of 2003. State-owned enterprises play a pivotal role in overseeing social
responsibilities, while small businesses in the state-owned enterprise partner program
must also follow their social responsibilities as per Regulation No. PER-05/MBU/2007.
CSR is mandatory and can impact performance measurement. Companies must
consider their social responsibilities, including the local community's values, culture,
and environment, as outlined in UU No. 25/2007 when investing capital. Research

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conducted by Gonçalves et al. (2021); Kuo et al. (2021); Okafor et al. (2021); Singh et
al. (2021); and Thuy et al. (2021), collectively demonstrate that CSR positively
influences company performance, making it an essential aspect of business growth,
performance measurement, and mandatory for all companies engaged in any activity.
Ahmed et al. (2019) and Kyere & Ausloos (2021) highlight that board size (BS)
significantly positively impacts a company’s performance. BS denotes the board size of
a company, which refers to the number of individuals serving on it, which is typically
disclosed in the notes to the financial statements. The board of directors plays a crucial
role in influencing the company's success by ensuring that the company complies with
relevant laws and regulations, as well as by prohibiting directors who have been
declared bankrupt from causing financial harm to the company due to potential criminal
penalties.
The study conducted by Uyar et al. (2021) revealed a direct correlation between
BI and the performance of the company. Board independence pertains to members of
the board of commissioners who have no prior association or involvement with the
organization. Meanwhile, directors with shares in the company align their interests with
shareholders to raise the level of performance for the company. The primary function of
board independence is to manage and enhance the quality of financial reporting,
resulting in relevant values and enhanced company performance. Therefore, board
independence has an impact on the company's performance (Fourati & Dammak,
2021).
The academic research completed by Harymawan et al. (2020) and Hidayat et al.
(2022) demonstrates that the NRC has a notable influence on company performance.
This committee provides oversight and advice in the establishment of fair policies and
rules for decision-making when implementing new policies. The committee's operations
are governed by rules set out in POJK Number 24/POJK.04/2014, and it is believed
that these regulations enable the committee to positively influence company
performance.
METHODS
The study was carried out on companies that were enlisted on the IDX, ESG
QUALITY, with a total of 45 companies being selected. The purposive sampling
technique was employed in the research, whereby the predetermined criteria were
outlined in Table 1, and served as a guide for the researchers in selecting the most
relevant and appropriate companies to include in the study.
Table 1. Criteria for Research Sample
Information Amount
Listed companies in IDX (2017-2021) 843
Companies selected as samples 45
Research period of 5 years 5
Total of samples 225
Number of outlier samples (20)
Total number of samples after outlier 205 sample
Source: Processed Data (2023)

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This research employs secondary data, which refers to data that has already
been analyzed and made publicly available by other researchers (Qadri et al., 2022).
However, it is essential to ensure that the data are reliable, relevant, and appropriate
for the research being investigated. Thus, this study used data from annual and
sustainability reports of selected companies from 2017 to 2021, which are commonly
used sources of data in studies related to CSR and corporate governance and can be
found on the IDX website.
Corporate Social
Responsibility
Board Size
Firm Performance
Board Independence
ROA
Nomination and
remuneration committee ROE
Firm Size
Leverage
Figure 1. Schematic Framework

Based on the theoretical framework presented in Figure 1, the hypothesis for the
study was formulated as follows:
H1: Corporate social responsibility significantly impacts firm performance.
H2: Board size significantly impacts firm performance.
H3: Board independence significantly impacts firm performance.
H4: Nomination and remuneration committee significantly impacts firm performance.
The research methodology used in this study is causal-comparative, which is

intended to identify the underlying reasons and causes behind the studied variables
(Ghozali, 2018). This study is focused on evaluating the direct linkages between CSR,
corporate governance, and firm performance. Table 2 outlines the variables utilized in
this research, along with the corresponding formulas applied as part of the analysis.

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Table 2. Measurement of the Variables
Variable Type Variable Name Formula Source

Dependent Return on Asset Net Profit Kyere & Ausloos
Variable Ratio Total Asset (2021)
Net Profit
Return on Equity Total Equity Tunio et al. (2020)
Ratio
Independent CSR Number of Items Disclosed Rahmi & Sukma
Variable 91 Wijaya (2019)
Board Size Number of board members Kyere & Ausloos

(2021)
Number of independent board members
Board
Independence Masitoh & Hidayah
(2018)
Nomination &
Remuneration Number of members of the NR committee Priyandani &
Committee Rohman (2019)
Control Firm Size Ln Total Asset Haryanto (2022)

Variable
Leverage Total Debt Priyandani &
Total Asset Rohman (2019)
The data gathered for this research is classified as panel data, as it comprises
both cross-sectional and time-series data. Therefore, the E-Views software will be
utilized to test and analyze the hypotheses. The following equation model was utilized
in this study:
Y = α + β1X1it + β2X2it + β3X3it + β4X4it + β5Z1it + β6Z2it + ɛ
Denotes:
Y = Dependent variable
X = Independent variable
Z = Control variable
α = Constanta
β = Coefficient beta
ɛ = Error term
i = Cross-section item
t = Time series item
RESULTS AND DISCUSSION

The descriptive statistical analysis conducted on the sample data presents crucial
insights into its distribution and variability. The results of this analysis, including
minimum and maximum values, average values, and standard deviation values,
provide valuable information on the degree of deviation from the mean. The data has
undergone an outlier test, and the descriptive statistical test was conducted on the
remaining data points, resulting in a sample size of 205.

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Table 3. Descriptive Statistical Test Result
Variable Descriptive Statistic

Min Max Mean Std. Dev
CSR 0,19800 0,80200 0,50823 0,12252
BS 4 12 6,57561 1,94795
BI 0 3 0,58537 0,76619
NRC 1 7 3,39024 1,09540
ROA -0,13358 0,24263 0,05390 0,05507
ROE -0,19104 0,29724 0,10783 0,07802
FS 28,78102 34,74444 31,20492 1,42900
LEV 0,08306 0,88972 0,50941 0,23717
Table 3 presents various outcomes derived from the sample data. Firstly, it
reveals that the CSR variable has a narrow distribution with a standard deviation of
0,12252. The values range from 0,19800 to 0,80200, with an average of 0,50823. The
BS variable exhibits limited variability, evidenced by its small standard deviation of
1,94795, and an average of 6,57561, with values ranging from 4,00000 to 12,00000.
The BI variable, on the other hand, shows a high degree of variability, as indicated by
the standard deviation of 0,76619. The average value of BI is 0,58537, with a minimum
value of 0,00000 and a maximum value of 3,00000. In addition, the NR variable
exhibits low variability, with a small standard deviation of 1,09540, and an average of
3,39024. Its values range from 1,00000 to 7,00000. The variable of FS, which serves
as a control in the study, demonstrates a maximum value of 34,74444 and a minimum
value of 28,78102. The relatively low standard deviation of 1,42900 implies that the
selected companies possess assets of relatively small average sizes. Likewise, the
leverage control variable has a standard deviation of 0.23717, with a maximum and
minimum value of 0.88972 and 0.08306, respectively, indicating homogeneity or less
variability of data around the mean value. Table 3 also shows that the sampled Kehati
companies have an average ROA of 0,05390 or 5.39% and an average ROE of
0,10783 or 10.783%. These average values of ROA and ROE indicate that Kehati
companies are moderately profitable, with a relatively stable financial performance.
However, it is crucial to carry out several tests such as the Hausman tests and
Chow tests to ascertain the optimal model that corresponds to the research data, and
to ensure the accuracy and inclusiveness of research findings.
Table 4. Chow Test
Dependent Variable: Firm Performance (ROA)

Independent Variables: CSR and Corporate Governance
Effect Test Statistic d.f. Prob
Cross-section F 8,44557 (41,157) 0,0000
Cross-section Chi-Square 238,7999 41 0,0000
Dependent Variable: Firm Performance (ROE)
Independent Variable: CSR and Corporate Governance
Effect Test Statistic d.f. Prob
Cross-section F 6,273135 (41,157) 0,0000
Cross-section Chi-Square 198,8704 41 0,0000

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Table 4 displays the outcomes of the redundant fixed effect test that explores the
effects of the variables analyzed in the study. The objective of this test was to identify
the regression model that most effectively explains the connection between the
common effect model (CEM) and the fixed effect model (FEM). The results show that
the probabilities associated with the interrelation between CSR and corporate
governance on ROA and ROE are statistically significant because the probability is
0.0000, which is below the significance level α (α = 0.05). The next table, Table 5, will
feature the results of the Hausman test.
Table 5. Hausman Test

Test Summary Chi-Sq Statistic Chi-Sq. d.f. Prob.
Cross-section random 5,195641 6 0,519
Test Summary Chi-Sq Statistic Chi-Sq. d.f. Prob.
Cross-section random 5,96288 6 0,427
The results of the Hausman test, as shown in Table 5, suggest that the
probabilities associated with the impact of CSR and corporate governance on ROA
(0,519) and ROE (0,427) exceed the significance level α (α = 0.05). As all probability
values displayed in Table 5 are greater than α (α = 0.05), the random effect model
(REM) has been deemed the more favorable model. Therefore, to determine which
model is more effective between the CEM and REM, the Lagrange multiplier test will be
displayed in Table 6.
Table 6. Lagrange Multiplier Test

Test Hypothesis
Cross-section Time Both
101,7328 1,2045 102,9283
Breusch-Pagan
(0,0000) (-0,2724) (0,0000)
Independent Variable: CSR and Corporate Governance
Test Hypothesis
Cross-section Time Both
57,79033 0,35825 58,14858
Breusch-Pagan
(0,0000) (-0,54950) (0,0000)

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Table 6 features the results of the Lagrange Multiplier test, which can be utilized
to establish whether the CEM or REM is more suitable for the study. If the cross-
section value of Breusch-Pagan exceeds α (α = 0.05), then CEM can be considered.
Conversely, if the value falls below α (α = 0.05), REM may be more suitable. Since all
values in Table 6 are below α (α = 0.05), REM is the preferred model to use. The
findings of the regression test employing REM are shown in Table 7.
Table 7. Regression Test Results

Variable Coefficient Std. Error t-Statistic Prob.
C 0,128598 0,163779 0,785188 0,4333
CSR -0,05844 0,048349 -1,20876 0,2282
BS 0,002325 0,002993 0,776851 0,4382
BI 0,00745 0,004971 1,498704 0,1355
NRC 0,000664 0,003934 0,168678 0,8662
FS 0,000446 0,005748 0,077579 0,9382
LEV -0,15775 0,027773 -5,67989 0,0000
Variable Coefficient Std. Error t-Statistic Prob.
C 0,279592 0,25844 1,081848 0,2806
CSR -0,20559 0,073807 -2,78551 0,0059
BS 0,007021 0,004975 1,411194 0,1598
BI 0,015023 0,008272 1,816051 0,0709
NRC 0,006539 0,006522 1,002595 0,3173
FS -0,00283 0,009169 -0,30879 0,7578
LEV -0,10854 0,04333 -2,50487 0,0131
The outcomes of the regression analysis in Table 7 indicate that CSR has a
significantly adverse impact on firm performance, as measured by ROE. This is
supported by the probability value of 0,0059, which is below 0,05, and a coefficient of -
2,78551. In contrast, the effect of CSR on firm performance, as measured by ROA,
was found to be not statistically significant as it has a probability value greater than
0,05, specifically 0,2282, and a coefficient of -1,20876. The study's results demonstrate
that there is no significant relationship between corporate governance, as measured by
BS, BI, and NRC, and firm performance, as measured by both ROA and ROE.
Furthermore, the study demonstrates that including FS, as a control variable does not
have a statistically significant effect on firm performance, as measured by ROA or
ROE, as evidenced by its probability values of 0,9382 and 0,7578, respectively, both
exceeding 0,05. Conversely, the second control variable, leverage, has a significant
negative correlation on ROA, with a probability value of 0,000 and a coefficient of -
5,67989, while not affecting ROE.
Hypothesis Testing (H1)

The research on the amidst between CSR and company performance, as gauged
by ROA was found to be insignificant. This means that the use of ROA as a gauge of
company performance is not affected by CSR. This scenario implies that the

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implementation of CSR can be costly and divert funds from other business purposes,
resulting in short-term negative effects on financial performance. Additionally, CSR
programs are seen as a social responsibility rather than a direct driver of financial
performance. This finding aligns with the study conducted by Benali et al. (2021), Matei
et al. (2021), and Nzuki & Opuodho (2022). Conversely, the firm's performance
measured by ROE can be negatively influenced by CSR. The higher costs associated
with CSR implementation, which can surpass regular operational expenses, can lead to
a decline in the company's performance, indicating that CSR has an adverse effect on
company performance. This study supports the findings of previous research
conducted by Lee and Yang (2021), Ratajczak (2021), and Zhou et al. (2021) but
contradicts the study by Sharma et al. (2021).

Based on the examination, it can be concluded that there is no notable
association between the BS variable and company performance, as measured by the
ROA and ROE indicators. Hence, this hypothesis is proven to be rejected. The board
size refers to the number of members serving on the board of directors of a company.
The notes to the financial statements generally include the necessary information,
specifically regarding the composition of the board of directors at the end of the fiscal
year. Each member of the board has a distinct role to play in the company's operations.
However, the board of directors only plays a minor role in determining the company's
overall performance in a company but does not influence the company's performance.
This study aligns with the study Chaudhry et al. (2020) and Cherian et al. (2019).

The data gathered and analyzed for the third hypothesis indicate that the
performance of the firm is not significantly influenced by BI, leading to the rejection of
the hypothesis. BI is primarily tasked with ensuring the quality of financial reports and
controlling the performance of the company's activities. Nonetheless, it is not directly
related to the financial performance of the company because BI does not have any
control over the actual operations of the company. Instead, its role is to oversee the
company's financial reporting and ensure that the interests of shareholders are taken
into account. Thus, while important for corporate governance, BI is not a significant
determinant of a company's financial performance. This finding is in agreement with the
study by Ramirez et al. (2020).

The regression test conducted by the study indicates that NRC has no
considerable outcome on the company's performance based on ROA and ROE
measurements, leading to the rejection of the fourth hypothesis. The NRC is
accountable for supporting the Board of Commissioners in their tasks and providing
assistance in the nomination and remuneration process of the Board of Commissioners
and directors. However, the role of NRC in determining performance is insignificant as
the board of commissioners' role is limited to overseeing and providing advice, rather
than directly establishing rules affecting the company's performance. The appointment
of NRC members should be transparently regulated, as stated in POJK Regulation No.
34/POJK.04/2014 published on December 8th, 2014. These results are consistent with
prior research conducted by Dasgupta (2022) and Zakaria (2018).

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CONCLUSION
Based on the evidence presented in this study indicates that the corporate
governance components of board size, board independence, and nomination and
remuneration do not have a considerable significance for the financial performance of a
company, as gauged by ROA and ROE. However, one key finding of this study is that
while there is no significant correlation between CSR and ROA, a significant negative
relationship exists between CSR and ROE, suggesting that CSR can have an impact
on a company's financial performance as measured by these indicators. In terms of
control variables, the study found no significant association between firm size on ROA
and ROE, while leverage is significantly and negatively associated with the financial
performance of a company, as measured by both ROA and ROE. These results
underscore the potential influence of CSR and corporate governance on a company's
performance.
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Almana : Jurnal Manajemen dan Bisnis

Volume 7, No. 3/ December 2023, p. 460-471

The Impact of Corporate Social Responsibility and Corporate Governance on

Fendy Cuandra*1, Hardy Winata Lie2

Abstract: The KEHATI-listed companies have displayed commendable SRI

Submitted: May 10, 2023; Revised: November 21, 2023;

disclosure, namely sustainability, corporate responsibility, and transparent reporting

Submitted: May 10, 2023; Revised: November 21, 2023;

Table 1. Criteria for Research Sample

Submitted: May 10, 2023; Revised: November 21, 2023;

Figure 1. Schematic Framework

The research methodology used in this study is causal-comparative, which is

Submitted: May 10, 2023; Revised: November 21, 2023;

Table 2. Measurement of the Variables

Variable Type Variable Name Formula Source

Board Size Number of board members Kyere & Ausloos

Control Firm Size Ln Total Asset Haryanto (2022)

Y = α + β1X1it + β2X2it + β3X3it + β4X4it + β5Z1it + β6Z2it + ɛ

RESULTS AND DISCUSSION

Submitted: May 10, 2023; Revised: November 21, 2023;

Table 3. Descriptive Statistical Test Result

Variable Descriptive Statistic

Table 4. Chow Test

Dependent Variable: Firm Performance (ROA)

Submitted: May 10, 2023; Revised: November 21, 2023;

Table 5. Hausman Test

Dependent Variable: Firm Performance (ROA)

Table 6. Lagrange Multiplier Test

Dependent Variable: Firm Performance (ROA)

Submitted: May 10, 2023; Revised: November 21, 2023;

Table 7. Regression Test Results

Dependent Variable: Firm Performance (ROA)

Hypothesis Testing (H1)

Submitted: May 10, 2023; Revised: November 21, 2023;

Hypothesis Testing (H2)

Hypothesis Testing (H3)

Hypothesis Testing (H4)

Submitted: May 10, 2023; Revised: November 21, 2023;

Submitted: May 10, 2023; Revised: November 21, 2023;

Submitted: May 10, 2023; Revised: November 21, 2023;

Performance. International Journal of Economics and Financial Issues, 10(2),

Submitted: May 10, 2023; Revised: November 21, 2023;

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