The Critical Factors Affecting the Implementation of Corporate Governance in Indonesia: A Structural Equation Modeling Analysis

Abstract

The concept of corporate governance has become a topic of global discussion since The New York Stock Exchange crashed on 19 October 1987, when many multinational companies listed on the New York Stock Exchange experienced large financial losses. CG was a preventive measure and increased investor confidence in the company. CG implementation is influenced by isomorphisms, such as organizational structure and the external environment in the form of regulation, competition, and culture. In Indonesia, the quality of CG implementation still contributes to the country’s economic growth. Weak CG implementation is due to the adoption of the western system immediately. It arises due to a high ownership structure, government intervention, underdeveloped capital markets, and weak law enforcement. This study aims to examine and analyze more deeply about factors that cause CG not to be inadequate to develop properly in Indonesia. Private and state-owned companies in the East Kalimantan Industrial Estate are the research samples for the SOR modelling exploration method. The SOR (stimulus-organism-response) model is a novelty in identifying CG implementation. Identification of the model to obtain a structural model is carried out by using PLS-SEM (partial least square structural equation modelling) through an institutional approach. The results found that the organizational structure and national cultural environment strongly influence CG implementation through the mediation of organizational structure. The contribution to understanding the national cultural environment in CG implementation efforts will be driven by organizational structure. Comprehensively, this study describes other factors such as organizational culture, environment competition, and the environment mediated by organizational structure. The national cultural environment mediated by organizational culture did not significantly affect CG.