International Seminar on Business and Management

Improving Business Competitiveness Through Integrated System

Widyatama Bandung, April 27 – 28, 2011 De La Salle Lipa

Analysis of GCG Application Toward Banking Productivity

in Indonesia
Devy Mawarnie Puspitasari
Faculty of Bisnis and Management, Widyatama University, Widyatama
E-mail : devy.mawarnie@widyatama.ac.id

ABSTRACT

Good Corporate Governance has linier relation with productivity of corporation or organization. GCG principle
consisted of fairness, transparency, accountability, independence and responsibility. Banking society realized the
importance of applying Good Corporate Governance (GCG). This research tries to find what the impacts, advantages
of implementing Good Corporate Governance on Banking operational in Indonesia before and after implementing
Good Corporate Governance. This research will use data from common bank according to listed banks on Central
Bank. This research used samples from the 5largest common banks in Indonesia based on bank listed in Central Bank.
This research is done toward the largest 5 common banks in Indonesia before and after applied Good Corporate
Governance. Data taken belongs to unclassified confidential bank from 1999 until 2007. Problems on this research
mostly are from the internal corporation. Nevertheless, economic condition and monetary stabilities will be used as
control variable. Variable used in this research includes dependent and independent variable. Independent variable
include CAMEL (CAR, ROA, ROE, OCOI and LDR) and external factor as independent variable (S on CAMEL), that
are rate and exchange rate. The image of bank analyzed will be as dependent variable. Tools of analysis that are used
to process data are Multi Correlation Analysis Method and Regression Analysis Method.

Keywords: Good Corporate Governance (GCG), CAMELS, Multi Correlation and Regression Analysis Method.

1. INTRODUCTION
Economic matters and monetary policy are dealing with structural problem in macroeconomic. Uncertain condition
worsens banking condition in Indonesia. Economic recovery measure relates to politic reformation that Indonesia has
been doing and cannot be avoided. But every plan and program cannot be aimed only for quick recovery, but also for
achieving economic recovery. Recovery efforts can be done with Good Corporate Governance. Good Corporate
Governance and studies have been done in national and international industries. Banking is one of the economic
wheels a country. It has an important part to mobilize fund of society. A lot of efforts and measures have been done by
Central Bank to create financial system stability and to achieve monetary policy effectiveness.
Lately, banking society realized the importance of applying Good Corporate Governance (GCG). Previously, GCG
principle consisted of fairness, transparency, accountability, independence and responsibility. The principle was
impressive and functioned as window dressing. But in fact, it is not easy to apply the principle because it needs serious
commitment between shareholders and bank management.
GCG Principle consists of five principles that positively influence management of business (BEI NEWS Edition 19
Year V, March-April 2004). The first is fairness principle. Bank should be concerned about all shareholders importance
based on equal treatment. But, bank needs to give the shareholders the opportunity to access for information in
accordance with transparency principle. The second is transparency principle. For example, bank must give information
which is punctuality, suitable, clear, accurate and comparable. The information must be easy to access by stakeholders
and suitable with their right. The third is accountability principle. It means bank must determine obvious responsibility
for each organization component in accordance with vision, mission, goal and company strategy.
Each organization component must understand its contribution in carrying out GCG. Besides, bank has to make check
and balance certainty in carrying out bank activities. Bank must possess productivity measure from all parts based on
corporate values, goal and bank strategy. Bank must also have reward and punishment system. The forth, is
independence principle. Bank must have ability to avoid unfairness for the majority of stakeholders. Bank management
must be able to avoid all kinds of conflicts of interest. The fifth is responsibility principle. It means that bank must keep
careful and sensible banking practices in order to maintain the corporate. Bank also needs to perform as good corporate
citizen.

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 International Seminar on Business and Management
Improving Business Competitiveness Through Integrated System
Widyatama Bandung, April 27 – 28, 2011 De La Salle Lipa

In Indonesia, the classification of implementing corporate governance toward organization or corporation listed on
Jakarta Stock Exchange (BEJ have been done by The Indonesian Institute for Corporate Governance (IICG) annually
since 2001. A lot of researchers have found positive relations between corporate governance and productivity/value of
corporate or organization (a.n Black, 2003; Klapper Love, 2002; Milton, 2000; and Darmawati, 2004). In fact Good
Corporate Governance has linier relation with productivity of corporation or organization. The objective research are
(1) identifying impacts of Good Corporate Governance before and after implementing it toward Banking operational in
Indonesia and (2) identifying advantages of implementing Good Corporate Governance to the development of banks in
Indonesia.
2. FRAMEWORK AND HYPOTHESIS
Corporate Governance issue has appeared since the division between ownership and manager corporation (Tri Gunarsih,
2003). However, corporate governance itself appeared for the first time explicitly in 1984 on Robert I.Tricker article. In
his book, Tricker said that governance had four main activities. They are:
Direction : Formulating the strategic direction for the future of the enterprise in the long term;
Executive action : Involvement in crucial executive decisions;
Supervision : Monitoring and oversight of management performance, and
Accountability : Recognizing responsibilities to those making legitimate demand for accountability.
(Tricker, Robert I., 1984, Corporate Governance – Practices, Procedures, and Power in British Companies and Their
Board of Directors, UK, Gower)
Two main related theories to corporate governance are stewardship theory and agency theory. Agency problems of
adverse selection and moral hazard continue to challenge principals due to two fundamental conditions that underlie
principal-agent reltionship-goal incongruance and information asymmetry (Fama, 1980;Jensen &Meckling, 1986;
Levinthal, 1988; Zajac, 1990). Agency costs can become especially problematic when the firm is perfoming poorly as
the interest of managers and principals have a greater tendency to diverge in such circumtance (Bebchuk & Fried, 2004;
Walsh & Seward, 1990). Stewardship theory is built on philosophy assumption about human characteristic that in fact
human is trustworthy, responsible, loyal and honest. In other word, Stewardship theory respects management as
trustworthy to act for public interest generally and shareholder specially. In the meantime, agency theory is developed
by Michael Johnson, a professor from Harvard, respects corporate management as agents for shareholder. Management
will act for the corporation importance consciously. It is not as like as stewardship model. Agency theory respected that
management as not trustworthy to act for public interest generally and shareholder specially. Eventually, “managers
could not be trusted to do their job – which of course is to maximize shareholder value‟ (Tricker, Opcit).
In practice, agency theory got wider responses more widely. A lot of ideas about corporate governance are based on
agency theory. This fact creates agency costs. This theory says that corporation must pay the expense increasing
enforcement for the cost and loss caused by disobedient management.
Cost which has to be paid, in corporate governance context, is cost for:
“…control managerial „opportunism‟ by having a board chair independent of the CEO and using incentives to bind
CEO interests to those of shareholders (Jensen, M.C., and W.H. Meckling (1986), „Theory of the firm – managerial
behavior, agency costs and ownership structure, “ Journal of Financial Economics, No. 3, pp. 305-60). The essence of
Corporate Governance is to rise productivity of the corporation by monitoring productivity and accountability of
management toward shareholders and other matters, based on the rules and regulations (Tri Gunarsih, 2003). Research
about Corporation Failure is known from financial report analysis. The main reason why financial report is used,
because generally financial report contains important information about condition and the corporation prospect in the
future (Muliaman, 2003). Financial report is a corporate productivity in the past and is often used to predict corporate
productivity in the future. Decisions are usually related with two mains information. Furthermore, financial report is a
substitute measurement in real characteristic observation in a corporation. Generally, ratio in the financial report
measures profitability, liquidity and solvability that indicate whether the corporation will succeed or go bankrupt.
This research collected data from 5 banks listed in Central Bank. The problems in this research are more on internal
organization. The data does not include confidential data of bank. Economic condition and stability of monetary will be
used as control variable. In this research, researcher makes hypothesis research:

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 International Seminar on Business and Management
Improving Business Competitiveness Through Integrated System
Widyatama Bandung, April 27 – 28, 2011 De La Salle Lipa

Table 2.1 Hypothesis Research

Number Hypothesis

Ho1 Good Corporate Governance related to bank‟s internal factor

This Ha1 Good Corporate Governance does not related to bank‟s internal factor hypothesis
will compare
condition Ho2 Bank‟s eksternal faktors related tothe image of Bank of banks
before
Ha2 Bank‟s eksternal faktors do not related to the image of Bank

Ho3 There is relation between bank‟s internal and eksternal faktor

Ha3 There is no relation between bank‟s internal and eksternal faktor

implementing Good Corporate Governance (GCG) from 1999 until 2001 and after implementing Good Corporate
Governance (GCG) from 2002 until 2007.

Collecting Data

Internal Faktor Eksternal Faktor

LDR, ROA, ROE, OCOI, CAR Rate, Exchange Rate

Multi Regression
Average Test
from 5largest bank Average in years

in year

Multi correlation Test

Selected Variable

Regression Test

Conclusion

Fiture 1: Framework

3. RESEARCH METHODOLOGY
This research will use data from common bank according to listed banks on Central Bank. Data taken belongs to
unclassified confidential bank. Problems on this research mostly are from the internal corporation. Nevertheless,
economic condition and monetary stabilities will be used as control variable. Variable used in this research includes
dependent and independent variable. Independent variable include CAMEL (CAR, ROA, ROE, OCOI and LDR) and
external factor as independent variable (S on CAMEL), that are rate and exchange rate. The image of bank analyzed
will be as dependent variable.
Beside quantitative, financial report can be qualitatively described it depends on the process and movement that is
happening in every bank. The object of this research is financial report banks in Indonesia. This step will be defined by
representative variable and it comes from internal and external factor of bank.
Variables selected as internal factor in bank productivity are LDR (Loan to Deposit Ratio), ROA (Return on Average
Asset), ROE (Return on Average Equity), OCOI (Operational Cost toward Operational Income) and CAR (Capital
Adequacy Ratio). Variables selected as internal factor in bank productivity are
Rate and Exchange Rate. In this research to describe bank productivity in Indonesia is by taking sample in stratification
and measuring productivity toward 5largest bank in Indonesia. This is done in order to generally represent bank

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 International Seminar on Business and Management
Improving Business Competitiveness Through Integrated System
Widyatama Bandung, April 27 – 28, 2011 De La Salle Lipa

productivity in Indonesia. They are Mandiri Bank, BRI, BCA, BNI and CIMB Niaga Banks. Multicorrelation (r) is used
to select independent variables in order to release from multi correlation that can make insignificant calculation.
After doing selection to determine independent variable(X) to represent the factor and condition happened, furthermore
regression analysis toward the image of banks in Indonesia will play the role as dependent variable(Y).
Coefficient Correlation: r = ∑XiYi
√ (n∑X2i) ( ∑Y2i)
Regression function equation: Y = a +b1X1 + b2X2 + b3X3 + b4X4 + biXi
4. ANALYSIS
The table below presents multi correlations toward variables which have possibility as indicator for applying Good
Corporate Governance.
Table 4.1 Result of Multi Correlation toward Independent Variable in External and Internal Factor in the Banks Before
Applying Good Corporate Governance

EXCHANGE
VARIABLE LDR ROA ROE OCOI CAR RATE
FOREIGN
LDR 1
ROA -0.1969 1
ROE 0.1858 0.9107 1
OCOI -0.3813 -0.4924 -0.5019 1
CAR -0.8238 -0.1060 -0.5059 0.1148 1
RATE -0.1215 -0.2711 -0.4817 -0.4611 0.6519 1
EXCHANGE
0.047 -0.3316 -0.4768 -0.5074 0.5193 0.9854 1
RATE
Source: SPSS

Table 4.2 Result of Multi Correlation toward Independent Variable in External and Internal Factor in the Banks After
Applying Good Corporate Governance

EXCHANGE
VARIABLE LDR ROA ROE OCOI CAR RATE
FOREIGN
LDR 1
ROA -0.9903 1
ROE 0.9664 0.9798 1
OCOI -0.9279 0.9409 0.9894 1
CAR -0.9413 0.895 0.8253 0.762 1
RATE -0.1266 -0.0004 0.0513 0.1066 0.2829 1
EXCHANGE
-0.0901 -0.0338 0.0296 0.0935 0.2326 0.9977 1
RATE

Source: SPSS

The tables above show that multi correlations happened very strong in each internal factor. Although, some are having
the same aim and some are not. But, it makes easier as it can be represented in one variable only. Similarly in external
factors, multi correlation happened between rate and exchange rate.
Before applying Good Corporate Governance rate and exchange rate relates to each others. But after applying Good
Corporate Governance, bank productivity has the power to influence each variable of bank productivity. As a result,
two variables from both factors are sufficient. First variable from internal is CAR, while second variable from external
is exchange rate. They both represent the real economic condition. After doing selection to determine independent
variable to represent the factor and condition happened CAR and Exchange Rate play the role as the independent
variables.
Furthermore, regression analysis toward the 5 largest banks in Indonesia will play the role as dependent variable.

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 International Seminar on Business and Management
Improving Business Competitiveness Through Integrated System
Widyatama Bandung, April 27 – 28, 2011 De La Salle Lipa

Table4.4 Regression Analysis Result (1999-2001)

Regression Statistic Keterangan

Multiple R 0,9792 Ho1 diterima

R Squared 0,9590

Standard Error 0,1753

Coefficients Standard Error T Stat

Intercept 246,1723 1,4760 166,7830

CAR 0,6519 0,1883 3,4607 Ho2 diterima

Exchange Rate 3,4733E-08 3,18705E-08 1,0898 Ho2 diterima

ANOVA

df F F table

Regression 2 11,6968 199,49 Ho3 diterima

Residual 1

Total 3

Table4.5 Regression Analysis Result (2002- 2007)

Regression Statistic Keterangan

Multiple R 0,5556 Ho1 diterima

R Squared 0,5521

Standard Error 1,3845

Coefficients Standard Error T Stat

Intercept 267,4931 2,7205 98,3215

CAR 0,2420 0,0311 7,6902 Ho2 diterima

Exchange Rate -2,256E-06 6,33189E-08 -35,6328 Ha2 diterima

ANOVA

df F F table

Regression 2 63,0407 199,49 Ho3 diterima

Residual 1

Total 3

Note: Significant α=0.05

Multi regression equation from SPSS output:

Y = 246.17 + 0.65 X1 + 3.47 10 -8 X2 (1)
-6
Y = 267.49 + 0.24 X1 – 2.25 10 X2 (2)
Where (1) Multi regression equation from SPSS output before applying GCG, (2) Multi regression equation from SPSS
output after applying GCG, X1 = Bank‟s internal factor (CAR) and X2 = Bank‟s external factor (Foreign Rate). Based

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 International Seminar on Business and Management
Improving Business Competitiveness Through Integrated System
Widyatama Bandung, April 27 – 28, 2011 De La Salle Lipa

on the analysis above, there are some matters related to applied Good Corporate Governance. In 1999-2001, bank
internal factor (CAR) and external factor (Exchange Rate) influence applied Good Corporate Governance in a
corporation. Internal and external factor condition in a corporation can indicate applied Good Corporate Governance.
We can see that the correlation between CAR and exchange rate is very close to influence the image of a bank. In 2002-
2007, bank‟s internal factor (CAR) influence applied Good Corporate Governance in a corporation. On the other hand,
external factor (Exchange Foreign) doesn‟t influence applied Good Corporate Governance in a corporation. As a result,
only internal factor condition can indicate applied Good Corporate Governance and the correlation between CAR and
exchange foreign do not very closely influence the image of bank.
5. CONCLUSION
Based on the analysis, the writer can draw some following conclusions first internal factor of bank can indicate applied
Good Corporate Governance in a corporation. Before applying Good Corporate Governance, financial ratios in internal
bank do not meet the standard. After applying Good Corporate Governance, the ratios are getting better. Investor or
stakeholder can use this information for decision making. External factor cannot be used as indicator to apply Good
Corporate Governance in a corporation. Before applying Good Corporate Governance, external ratio has relationship
with bank‟s image but after applying Good Corporate Governance, external ratio does not have relationship with bank‟s
image. Second, the advantages of applying Good Corporate Governance are that stakeholder and investor can use this
information to make decision. Besides, it can build trust and comfortable environment for society to save and invest
their money in a bank and correlation and regression can be used to know indicator that can represent factor of applied
Good Corporate Governance. Here are some suggestions for investor or shareholder in Indonesia, first Correlation and
regression method cannot be used entirely as a guidance to know more about applied Good Corporate Governance. It
needs more historical data and more complete variable for internal and external factor.
This analysis result is a short analysis that can used to monitor indicating factors to apply Good Corporate Governance.
Although I have minimum data, it can be used as indicator. Furthermore, this research can be as reference to make
following research in Indonesia.

REFERENCES

[1] Bank Indonesia. http:/bi.go.id/data statistik, 2010.

[2] Black, Klapper Love, Milton, and Darmawati, “Menata bank dengan Good Corporate Governance,” BEI NEWS,
Edition 19th Year V, Maret-April, 2004.
[3] D. Siamat, “Manajemen Lembaga Keuangan,” FEUI, Jakarta, 2001.
[4] L.A. Bebchuck and J.M Fried, “Executive Compensation as An Agency Problem,” Journal of Perspectives,
17(3):71-92.
[5] M.C. Jensen and W.H. Meckling, “Theory of The Firm-Managerial Behaviour, Agency Costs and Ownership
Structure,” Journal of Financial Economics, No. 3, pp. 305-60, 1986.
[6] M.H. Lubatkin, P.J.Lane, S.Collin and P. Very,“Origins of Corporate Governance in the USA, Sweden, and France,”
Organization Studies, 26:867-888, 2005.
[7] Muliaman, “Membangun Good Corporate Governance”, Journal Ekonomi dan Keuangan, vol. 4, 2003.
[8] T. Gunarsih, “Good corporate Governance, Pengertian dan Konsep dasar,” Journal Ekonomi dan Keuangan vol 4,2003.
[9] Robert I.Tricker, “Corporate Governance-Practise, Procedurs, and Power in British Companies and Their Board of Directors”,
UK, Gower, 1984.

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