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Archives of Business Review – Vol. 8, No.12
Publication Date: December 25, 2020
DOI: 10.14738/abr.812.9525. Kurniawanto, H., Sriwidodo, U., & Pupitasari, N. D. (2020). The Effect Board Characteristics On Enterprise Risk Management
Disclosures: Evidence from State-Owned Enterprise In Indonesia. Archives of Business Research, 8(12). 230-237.
The Effect Board Characteristics On Enterprise Risk Management
Disclosures: Evidence from State-Owned Enterprise In Indonesia
Hudi Kurniawanto
Doctor in Accounting, Faculty of Economics,
Universitas Slamet Riyadi, Surakarta, Indonesia
Untung Sriwidodo
Faculty of Economics, Universitas Slamet Riyadi,
Surakarta, Indonesia
Nurulastri Dwi Puspitasari
Faculty of Economics, Universitas Slamet Riyadi,
Surakarta, Indonesia
ABSTRACT
The purpose of this study is to examine the effect of corporate
governance, namely board characteristics on enterprise risk
management disclosure. The research object of State-Owned
Enterprises listed on the Indonesia Stock Exchange in 2018-2019, with
a total sample of 40 annual reports with purposive sampling technique
and multiple regression analysis. The results of this study prove that
board size no effect on enterprise risk management disclosure, while
board independence effect enterprise risk management disclosure.
This shows that the commissioners understand and carry out their
duties as an independent party in supervising, directing, and
evaluating the implementation of corporate governance and corporate
strategic policies so that Board Independence in State-Owned
Enterprises in Indonesia functions properly.
Keywords: Board Size, Board Independence, Corporate Governance,
Enterprise Risk Management Disclosure, Indonesia Stock Exchange
INTRODUCTION
The implementation of good corporate governance is not only the obligation of companies whose
shares are listed on the Indonesia Stock Exchange. State-owned enterprises (SOEs) as the dominant
business people and have a large market share in Indonesia have the same obligations. The results
of the assessment of good corporate governance based on data from the Master Plan of SOEs
showed that 13.76% of state-owned companies still need improvement in the implementation of
good corporate governance. Some cases have shown poor corporate governance practices in SOEs
in Indonesia. One of them is the profit mark-up made by the directors of Waskita Karya Company
amounting to Rp. 400 billion from the 2004-2008 period. The manipulation of financial statements
and corruption indicates the weak implementation of good corporate governance. This will harm
the community that meets the needs of its goods or services by SOEs.
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One important piece of information that is of particular concern to investors is the non-financial
segment of the annual report, especially on corporate governance (Amran, Bin, & Hassan, 2009).
Information related to corporate governance, such as internal control systems and risk
management systems, can convince investors that organizations avoid accounting irregularities.
According to (Lajili & Zeghal, 2005) disclosure of risk management provides guidelines for
evaluating management effectiveness in dealing with high market volatility, business uncertainty,
and its impact on the level of firm value, as well as the sensitivity of trading volume to risk.
In Indonesia, the increasing importance of implementing risk management has made every
company begin to implement good corporate governance, including state-owned companies whose
majority shares are owned by the government. Regulations regarding the implementation of good
corporate governance in state-owned enterprises are contained in the SOE Ministerial Regulation
No.PER - 01 / MBU / 2011. Following article 2 of the SOE Regulation No. PER - 01 / MBU / 2011,
SOEs are required to implement good corporate governance consistently and sustainably by
compiling a good corporate governance manual which includes a board manual, manual risk
management, and internal control system, an internal control system, reporting mechanisms for
suspected irregularities at the SOEs concerned, information technology governance, and ethical
code of conduct.
Research on Enterprise Risk Management (ERM) in Indonesia itself is mostly conducted on
companies in the financial sector. While researchers here are trying to research ERM with the
object of all state-owned companies listed on the Indonesia Stock Exchange (IDX) because
researchers believe that SOEs as a company whose majority shares are owned by the government
must be able to maximize profits to increase state revenue.
Empirically, the effect of corporate governance such as board size and board independence on
corporate risk disclosure has mixed results. Studies (Beasley, Clune, & Hermanson, 2005): (Elzahar
& Hussainey, 2012) found no effect between board size and corporate risk disclosure, whereas
(Abraham & Cox, 2007), (Lajili, 2009) ) found no influence between board size and corporate risk
disclosure. Studies (Lopes & Rodrigues, 2007), (Vandemaele, Vergauwen, & Michiels, 2009),
(Elzahar & Hussainey, 2012) found no effect between board independence and corporate risk
disclosure, while other studies found an influence between the two (Abraham & Cox, 2007), (Lajili,
2009), (Olveira, Rodrigues, & Craight, 2011), (Probohudono, Tower, & Rusmin, 2013).
The selection of SOEs as the research subject is based on the reason that good corporate
governance is an important issue as it is for private companies. The importance of this is further
strengthened by the explanation of the aims and objectives of establishing SOEs in article 2 of Law
no. 19 of 2003 concerning SOEs, namely that in addition to obtaining profits, SOEs also organizes
public benefits in the form of providing goods and/or services of high quality and adequate for the
fulfillment of the lives of many people. Adequate implementation and disclosure of good corporate
governance practices will ensure the protection of the interests of the wider community.
This study can contribute to the government as a reference in determining policies regarding risk
management disclosure of SOEs companies listed on the Indonesia Stock Exchange to increase
investor confidence. For company management, this study can provide information and
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URL: http://dx.doi.org/10.14738/abr.812.9525 232
Kurniawanto, H., Sriwidodo, U., & Pupitasari, N. D. (2020). The Effect Board Characteristics On Enterprise Risk Management Disclosures: Evidence
from State-Owned Enterprise In Indonesia. Archives of Business Research, 8(12). 230-237.
understanding of corporate risk management disclosures to help improve risk management
disclosure practices in the company and realize good corporate governance.
Based on the background description above, the purpose of this study is to examine the extent to
which corporate governance can affect enterprise risk management disclosure. The main question
of this research is whether the corporate governance mechanism represented by board size and
board independence can influence enterprise risk management disclosure. The purpose of this
study is to obtain empirical evidence of the effect of corporate governance on corporate risk
management disclosure.
LITERATUR REVIEW
According (Jensen & Meckling, 1976) an agency relationship occurs when the principal assigns a
task to a second party or agent to carry out tasks according to the principal's interests. Assigning
this task involves giving up the authority to make decisions. The principal is the owner of the
company whose job is to provide all the funds or facilities needed for the company's operations,
while the agent is someone who is selected and then contracted to be given the authority to manage
the company as best as possible. Based on this theory, agents are assumed to be rational
individuals, have personal interests, and try to maximize their interests. When the two related
parties try to maximize their respective interests, a conflict of interest arises, where the agent is
likely to prioritize his interests over the interests of the principal. This is because agents have an
interest in maximizing their welfare in addition to optimizing principal profits.
Agency theory is used in this study to understand the disclosure practices of risk management in
the company. The agent as the party who knows more about the condition of the company should
practice risk management disclosure. This is because risk information is important information
that can influence principal judgments about future circumstances faced by the company. The main
objective of risk management disclosure is to reduce information asymmetry that occurs between
agents and principals. Principals need information related to risks to improve their judgment in
decision making. Besides, the practice of risk management disclosure is also able to avoid the
company from conflicts of interest between agents and principals through monitoring by principals
to agents by observing the extent to which agents carry out risk management disclosure practices.
(Amran et al., 2009) stated that risk management is used by companies to manage their risks or to
seize opportunities related to achieving company goals. Risk management disclosure is a strategy
that holistically evaluates all risks faced by a company (Beasley et al., 2005). The enterprise risk
management disclosures make the management of uncertainty related to risks and opportunities
more effective with the aim of increasing value. Therefore, a proper risk management structure
can help manage business risk more effectively and disclose risk management results to
organizational stakeholders.
According to agency theory, a larger board of commissioners combines a variety of business
expertise which results in a more effective supervisory role in the board so that it will reveal more
risk information in the company's annual report (Singh, Mathur, & Gleason, 2004). A large number
of boards, the more effective the supervisory role is so that it can increase the company's risk
disclosure (Elzahar & Hussainey, 2012).
The results of previous research (Abraham & Cox, 2007), and (Lajili, 2009) found the effect
between board size and risk disclosure. Based on the description above, the hypothesis that can be