Implementation of Good Corporate Governance and Its Impact on Corporate Performance: The Mediation Role of Firm Size (Empirical Study from Indonesia)

Research Background In developed countries with a relatively prosperous economy, Good Corporate Governance (GCG) has been an issue for a long time. This problem is increasingly attracting the attention of the world community after a major crisis, such as a major crisis in the United States in 1929 and a banking crisis in Britain in 1970. In Indonesia, GCG issue began to arise since the 1990s, and started getting rolling in 1996, along with the Indonesian government's interaction with foreign countries as aid donor countries which highlights many of the conditions of economic and political development of Indonesia; and a major crisis which occurs in the third quarter of 1997. In general, practitioners and academics agree that one of the major crisis causes is awareness of the importance of GCG implementation in companies which is still low in Indonesia (CGPI Report in 2004). GCG is a series of mechanisms that can protect minority parties (outside investors/minority shareholders) from expropriation by managers and controlling shareholders (insider) with emphasis on legal mechanisms (Shleiver and Vishny, 1997). GCG is defined as a pattern of relationships, systems, and processes used by the organs of the company (Board of Directors, Board of Commissioners, GMS) to provide added value to shareholders on an ongoing basis in the long term, with due regard to the interests of other stakeholders, based on laws and norms that applies (Daniri, 2005). In Asia, including Indonesia, the concept of GCG began much discussed in mid-1997, when the crisis struck the region. Economic crisis and financial crisis in 1997-1998 made the company unable to pay debts to the bank and bonds in foreign currencies both principal and interest. Companies that are not capable of experiencing the problem cannot afford to pay the debt so that its value has decreased (Adler, 2004). The impact of the crisis showed that many companies could not survive. One of the reasons is because the growth that was achieved was not built on a solid foundation according to the principles of good corporate governance. In other words, the bad practice of GCG has made the companies failed in facing the crisis. Total assets which indicates the size of companies is an important factor in the formation of profit. Large firms are considered more stable so as to produce profits than small firms. Thus, size of the company estimated to have the influence on corporate performance (Sembiring, 2008). All this time, profit has always been the main focus in assessing corporate performance (Fauzan, 2006). Earnings ratio is used to measure how much the level of profits that can be obtained by the company. The greater the level of benefits obtained show that gets better the management manages the company. Sutrisno (2000) states that the ratio of profits can be measured by several indicators, such as: Net Profit Margin (NPM), Return on Asset (ROA), Return on Equity (ROE), Return on Investment (ROI) and Earning per Share (EPS). But Fauzan (2006) states that in assessing a corporate performance is not enough only using accounting profit, because profit accounting has no real meaning, unless supported by the company's ability to produce cash. In the 80's, an approach was born to overcome the weakness in assessing the corporate performance. This approach is known as Economic Value Adedd (EVA). Manurung (2004) argues that all parties want to know if the investment can create an added value for the company. EVA can be called as a tool to measure the results obtained by the company for the actions of the investment made which must be able to fulfill all expenses incurred by the company. Positive EVA indicates that the company managed to create value for the investors because the company is able to produce returns that exceed the cost of capital (Fauzan, 2006). Nur'Ainy (2010) examined the effect of GCG implementation on stock return through profitability, leverage and liquidity. …