Independent Directors and Firm Performance in Family Controlled Firms: Evidence from Indonesia

12 Pages Posted: 10 May 2011

See all articles by Muhammad Agung Prabowo

Muhammad Agung Prabowo

Sebelas Maret University

John L. Simpson

Curtin University - Centre for Research in Applied Economics

Date Written: May 2011

Abstract

We analyse the relationship between board structure and firm performance in family-controlled firms using a sample of Indonesian non-financial companies. We find that the share of independent directors on the board has an insignificant relationship with firm performance. We suspect that the result is driven by the lack of institutional reforms in relation to the appointment of independent directors. Our analysis shows strong empirical support for the proposition that family control (family ownership and family involvement on the board) is negatively related to firm performance. However, the significant effect of family ownership disappears when family involvement on the board is taken into the model. This result indicates that family ownership is more detrimental to firm performance whenever the family is highly involved in control decisions. Our results suggest that Indonesia needs to implement governance reforms that prevent majority owners from exercising excessive control over firms.

Suggested Citation

Prabowo, Muhammad Agung and Simpson, John L., Independent Directors and Firm Performance in Family Controlled Firms: Evidence from Indonesia (May 2011). Asian-Pacific Economic Literature, Vol. 25, Issue 1, pp. 121-132, 2011, Available at SSRN: https://ssrn.com/abstract=1837155 or http://dx.doi.org/10.1111/j.1467-8411.2011.01276.x

Muhammad Agung Prabowo (Contact Author)

Sebelas Maret University ( email )

Jl. Ir. Sutami 36A
Kentingan
Surakarta, Jawa Tengah
Indonesia

John L. Simpson

Curtin University - Centre for Research in Applied Economics ( email )

GPO Box U1987
Perth, Western Australia 6845
Australia

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