Independency The proportion of Independent Commissioners

21 their respective assignments and authorities. However, the execution of tasks by each member of the Board of Directors remains to be a collective responsibility. The position of each respective member of the Board of Directors including President Director is equal. The duty of the President Director as primus inter pares is to coordinate the activities of the Board of Directors. For the Board of Directors to be able to effectively exercise its duties, the following principles shall be observed: 1. The composition of the Board of Directors shall enable it to make effective, right and timely decisions and to act independently; 2. The members of the Board of Directors must be professional that possess the integrity, experience and capability required for carrying out their respective duties; 3. The Board of Directors shall be responsible to manage the company for the purpose of achieving profitability and ensuring the company’s sustainability; 4. The Board of Directors shall be accountable for its management to the General Meeting of Shareholders in accordance with applicable laws and regulations.

2.3.5 The Impact of Corporate Governance Disclosure of Firm Performance

Better corporate governance is likely to improve the performance of firms, through more efficient management, better asset allocation, better labor practices, or similar other efficiency improvements Claessens, 2006. Drobetz et al. 2004 argue that agency problem, the foundation of agency theory, is likely to exert impact on a firm’s stock price by influencing expected cash flows accruing to 22 investors and the cost of capital. Firstly, low stock price result from the investors’ anticipation of possible diversion of corporate resources. Theoretical models by La Porta, Lopez-de-Silanes, Shleifer and Vishny 2002 and Shleifer and Wolfenzon 2002 also predict that in the existence of better legal protection, investors become more assured of less expropriation by controlling bodies and hence, they pay more for the stocks. Secondly, through reducing shareholders’ monitoring and auditing costs, good corporate governance is likely to reduce the expected return on equity which should ultimately lead to higher firm valuation. There exists a well number of anecdotal evidence of a link between corporate governance practices and firm performance. But the empirical studies mainly focus on specific dimensions or attributes of corporate governance like board structure and composition; the role of non-executive directors; other control mechanisms such as director and managerial stockholdings, ownership concentration, debt financing, executive labour market and corporate control market; top management and compensation; capital market pressure and short- termism; social responsibilities and internationalization. Though the relationship between shareholders, directors and management has been the central topic of corporate governance research for a long time, focusing merely on the legal company and the firm as the agent of the shareholder seems no longer sufficient and time has come to view the governance of the firm as a whole Van den Berghe, 2002. Moreover, as Ho 2005 argues, evaluating corporate governance on individual dimension or attribute may not capture the total effect of corporate governance as much as the case where all the attributes 23 are considered collectively. 3 Hence, researchers often attempt to measure overall corporate governance and try to identify the relationship between corporate governance and firm performance.

2.3.6 Good Corporate Governance Development in Indonesia

The Indonesian business world needs various instruments to increase its competitiveness. One key instrument from a shareholder’s viewpoint is good corporate governance. Companies who implement good corporate governance in a proper and continuous manner have an advantage over other companies who do not implement or have not implemented good corporate governance. Challenges faced by the business world will continue to become more complex. The challenges for business will be increasingly not limited by borders as information technology development continues to penetrate our daily lives. The challenges vary from the very simple to the vary complex. The Code and its application by business will benefit businesses in responding to these many challenges. The Code is intended to be dynamic and evolutionary in nature. It will need to reflect the changes in the business environment in this era of globalization, and the business world is faced with a new paradigm, the stakeholders’ value added maximization paradigm. Without providing a value increase, it is difficult for the business to maintain its competitiveness. The higher competitiveness will start as companies gain enough experience and the benefit from good corporate governance implementation. Now, Indonesia has launched The Indonesian Good Corporate Governance GCG Roadmap issued by Financial Services Authority OJK for issuers and 24 publicly listed companies on 2014. The corporate governance roadmap is formulated by all stakeholders of corporate governance in Indonesia and supported by International Financial Corporation IFC, a World Bank subsidiary. It is expected that this GCG roadmap can be used as the main reference for comprehensively improving practices and regulations related to good corporate governance in Indonesia, particularly for issuers and publicly listed companies, said Chairman of OJK Board of Commissioners Muliaman D. Hadad. Considering Indonesia n’s role in Association of South East Asian Nations ASEAN region, this roadmap will give a positive contribution for improving good corporate governance. The aim is so that the GCG roadmap can stand equally to the roadmap in ASEAN region, in the framework of welcoming ASEAN Economic Community in 2015. The roadmap is created to provide overall description about various aspects of corporate governance that must be improved, namely: corporate governance framework, shareholders protection, stakeholders’ roles, transparency of information, as well as roles and responsibilities of the board of commissioners BOC and board of directors BOD. The roadmap is arranged using main references and refers to international standards related to good corporate governance. Indonesia has learnt from experiencing the global financial crisis in 1998 and 2008 that corporate governance is highly crucial. Poor implementation of corporate governance has been identified as one of the reasons that caused global financial crisis. In relation to this, improvement of corporate governance 25 implementation in issuers and publicly listed firms in Indonesia becomes first priority now. This roadmap exists to facilitate the priority realization. OJK and IFC have been committed to leverage the quality of GCG implementation in companies in Indonesia, particularly those in financial services sector, based on corporation agreement signed on June 17th, 2013. IFC is a subsidiary of the World Bank, which has been contributing to the development of 48 corporate governance codes in 32 countries. OJK realizes that contributions from all stakeholders of corporate governance in Indonesia are very significant in achieving the objectives of the roadmap. Considering the matter, OJK has formed corporate governance task force CGTF, which has a special task to develop corporate governance roadmap together with IFC. This task force encompasses representatives from regulatory institutions Bank Indonesia, State-Owned Enterprises Ministry, Taxation Directorate General, State Development and Finance Comptroller, Indonesian Accounting Association, and Indonesia Stock Exchange and governance institutions National Committee on Governance Policy, Indonesian Institute for Corporate Directorship, Indonesian Institute for Corporate Governance, and Indonesian Institute of Commissioners and Directors.

2.4. Sustainability Report

The issue of sustainability has been one of the most significant developments in the investment community in recent years, and corporate information on environmental, social and governance ESG issues has become an increasingly essential information source for investment decisions of capital 26 market participants. Broad empirical evidence supports the notion that ESG factors are relevant to companies’ economic performance and, thus, are relevant to investment analysis Margolis et al., 2007; Orlitzky et al., 2003. For a number of years, the investment community has had extensive discussions of the quality of sustainability reporting, which constitutes a primary reason for the community’s skepticism toward integrating ESG into investment decision-making processes Juravle and Lewis, 2008; Sullivan, 2011. Recently, however, the content quality of corporate sustainability reports has improved significantly Foretica, 2011. This change is the result of greater awareness of corporate governance issues, which in turn leads to greater transparency Kolk, 2008, and of a growing number of mandatory sustainability frameworks around the world Ioannou and Serafeim, 2011. Moreover, a number of sustainability initiatives have found wide-spread adoption on a global scale. Nevertheless, the question of the reporting format for sustainability reports has increasingly arisen in research and practice Eccles Krzus, 2010; Eccles Serafeim, 2011. Reports have increasingly arisen in research and practice Eccles Krzus, 2010; Eccles Serafeim, 2011.

2.4.1 The Concept of Sustainable Development

The development of non-financial reporting which typically for organizations beginning the sustainability reporting journey began in the US in the 1980s. The key focus at that time was on environmental reporting, as external stakeholders became concerned with the impacts of organizations on a wide variety of community resources e.g. air, land and water emissions, waste and 27 whether the resources would be sufficient for future growth. In addressing the issue, Hubbard 2008 stated that the Brundland Commission WCED 1987 developed the term “sustainable development” defining as: “Development that meets the needs of the present without compromising the ability of future generations to meet their own needs” It is argued that globally we must ensure that our generation’s consumption patterns do not negatively impact on future generation’s quality of life Deegan, 2000, p. 300. In 1998, Elkington developed the term “triple bottom line” to argue the case for reporting environmental and social performance together with economic performance. The triple bottom line concept implied that economic, environmental, and social performance were to be balanced and were of equal importance Hubbard, 2008. Elkington’s first theory is capitalism must satisfy legitimate demands for economic performance. Elkington echoes Adam Smith’s theory that the firm has one and only one goal to satisfy the desires of shareholders by making profits. However, profit may not be attainable if the environment in which the business operates is neglected. Hence, according to Elkington, firms must also be accountable for social and environmental performance. The economic, social and environmental consciousness of corporations, the tripod goal, creates a balance that makes their operations and actions sustainable a corporation which accommodates the triple bottom line is contributing to sustainable development Ngwakwe, 2008. 28 Corporate responsibility strategies are perceived to be related to sustainable development. Sustainability philosophy assumes that we abandon a narrow version of a classical economic theory and develop corporate strategies that include goals that go beyond just maximizing shareholder’s interest. Attention is directed to the demands of a wider group of stakeholders since the firm’s success depends on stakeholder’s satisfaction Bucholz and Roshenthal, 2005; Freeman, 1984; Hardjano and Klein, 2004; Michael and Gross, 2004 in Lopez et al, 2007 Companies are becoming aware that they can contribute to sustainable development process Lopez et al, 2007. Sustainable development is obtained through the management of environmental, natural, economic, social, cultural and political factors. These issues are interrelated and therefore should not be considered independently Sage, 1999, p. 196 in Lopez et al, 2007. Furthermore, investors are increasingly seeking to invest in socially responsible investments SRI in those companies deemed to be following good social and environmental practices Hubbard, 2008. They also need social, ethical, and environmental information. Naturally, a company which is sustainable will be less risky than one which is not. Consequently, most large companies in their reporting mention sustainability and frequently it features prominently Aras and Crowther, 2009. Since the social, ethical, and environmental SEE performance of a corporation may directly impact on its financial position, the corporation has to provide sound SEE information to investors Hummels and Timmer, 2004. 29

2.4.2 Sustainability Report Definition in General

Sustainability report is a new term which is widely used to explain the communication of the companies’ effect on social, environmental and economic performance which is also referred to as “triple bottom line reports” profits, people, and planet. Many large companies publish such kind of reports especially for the company which is socially environmentally sensitive such as oil and gas, mining, chemical, automotive, computers, and electronics Choi, 2006, p. 158. It is published to fulfill the need of wide range of stakeholders which is not only limited to investors and creditors, but also include employees, customers, suppliers, governments, activist groups, and the general public’s. Hubbard 2008 states the purpose of sustainability reporting is to provide information which holistically assesses organizational performance in a multi- stakeholder environment. In the social area, it is focus on contributing back to the society and community, providing growth and development opportunities for employees and improving relationships and practices for customers, suppliers, governments and communities. The notion of reporting against the three components or bottom lines of economic, environmental, and social performance is directly tied to the concept and goal of sustainable development Deegan, 2000, p. 289 Triple bottom line reporting, if properly implemented, will provide information to enable others to assess how sustainable an organization’s or a community’s operations are. The perspective taken is that for an organization to be sustainable long-term perspective, it must be financially secure as evidenced 30 by such measures as profitability, minimize or ideally eliminate its negative environmental impacts and act in conformity with societal expectations. These three factors are obviously highly interrelated Deegan, 2000, p.289. A sustainability report can be thought of as an impact statement for the entire corporation, which is defined not only in terms of natural resources and climatological effects, but also in terms of economic and social impacts of labor practices, charitable endeavors, and governance structures Leibs, 2007, December. Sustainability report is closely related with corporate social responsibility reporting which has a voluntary character. Social responsibility reporting refers to the measurem ent and communication of information about company’s effect on employee welfare, the local community, and the environment. Information on company welfare may involve working conditions, job security, equal opportunity, workforce diversity, and child labor. Environmental issues may include the impact of production process, products, and services on air, water, land, biodiversity, and human health Choi, 2006, p. 158. However, corporate social responsibility reporting focuses only on environmental and social disclosure, while the concept of sustainable development tied in sustainability reporting involves broader area that covers environmental, social, and economic performances. As the campaign of sustainable development has been increase, many corporate non-financial reports, corporate social responsibility reports now have been repackaged as sustainability report Lopez et al, 2007. 31

2.4.3 Global Reporting Initiative GRI Definition of Sustainability Report

Global Reporting Initiative GRI is a network- based organization that has pioneered the development of the world’s most widely used sustainability reporting framework. Sustainability reports based on the GRI framework can be used to benchmark organizational performance with respect to laws, norms, codes, performance standards and voluntary initiatives; demonstrate organizational commitment to sustainable development; and compare organizational performance. GRI promotes and develops this standardized approach to fulfill demand for sustainability information. As economy globalizes, new opportunities tend to generate prosperity and quality of life that are arising are accompanied by new risks to the stability of the environment. According to Global Reporting Initiative 2011, there is a contrast between the improvement in the quality of life and alarming information about the state of the environment and the continuing burden of poverty and hunger on millions of people. It raises an issue about how to create new and innovative choices and ways of thinking. New knowledge and innovations in technology, management, and public policy are challenging organizations to make new choices in the way their operations, products, services, and activities impact the earth, people, and economics. It is the Global Reporting Initiative’s GRI mission to fulfill this need by providing a trusted and credible framework for sustainability reporting that can be used by organizations of any size, sector, or location. Sustainability reports based on GRI Reporting Framework disclose outcomes and results that occurred within the reporting period in the context of 32 the organization’s commitments, strategy, and management approach. The GRI Reporting Framework is intended to serve as generally accepted framework for reporting on an organiz ation’s economic, environmental, and social performance. Furthermore, The Global Reporting Initiative GRI is an Amsterdam- based nonprofit organization, which is made up of stakeholders mainly from business, government, and social advocacy groups Leibs, 2007, December 1. For the past eight years, GRI’s framework has been available as at least one formal framework to follow when communicating corporate sustainability efforts and exposures Leibs, 2007, December 1. Although it is widely used, GRI’s framework is not an officially sanctioned standard Leibs, 2007, December 1. The GRI’s generally accepted framework for companies implementing sustainability reporting continue s to evolve “How accountants,”2002, October. Now in its third iteration, the GRI framework has become much more detailed regarding the performance indicators companies are urged to measure and monitor Leibs, 2007, December. By providing in six comprehensive categories guidance on details such as how to craft a broad statement of strategy and which specific performance indicators to measure, the GRI framework has brought increasing levels of rigor to the practice of sustainability reporting Leibs, 2007, December. As of December 2007, the GRI framework had almost 80 indicators, many of which could be broken down into various subcategories Leibs, 2007, December. For example, in the emissions, effluents, and waste subcategory, the GRI framework advised companies to report total direct and indirect greenhouse gas emissions by weight and total weight of waste by type and disposal method Leibs, 2007, December. 33

2.4.4 Impact of Sustainability Disclosure of Firm Performance

It can be generalized that sustainability reports does have an association with company performance. However, further analysis shows that only social performance disclosure has an association with company’s performance. For companies, improving sustainability performance is important. Even it is as important as improving company’s financial performance. Sustainability means the development that meets the needs of the present without compromising the ability of future generations to meet their own needs. It means that, in running the business, a company need to concern to the needs of future generations. The consumptions made by a company as the input to produce and to provide goods and services, should not negatively impact the quality of the consumption of future generation. It is important to remind, especially for companies, that generating profit is not merely the aims of the business. Being care and responsible to the environment become important aspects in running the business in order to increase the company’s reputation, increase profitability and bring benefits to the entire stakeholders. Obviously, stakeholders such as employees, suppliers, governments, activist group, investors, and communities’ around the business are very important to be considered. Without the credibility and trust that is put by them, business is impossible to run. In addition, this world now has been facing global warming and climate change problem. The awareness of a company regarding those problems is a must. That is why besides improving the profitability, a company should be responsible for managing the sustainability. 34 For investors, it is important for them to be selective in making investment decision. Besides making investment decision based on information of financial performance, it would be better if investors also consider about the performance of companies in managing sustainability. They should consider about this non- financial aspect in making investment and lending decision. Investing in profitable and socially responsible companies would be better than investing in a company with a high profitability but have been neglecting the environment. High profitability might be look good in the eye of only one part of stakeholder that is investors. Whereas, high performance of sustainability might be look good in the eye of the entire stakeholders. Sustainability reports cause company management to be more focused on social and environmental issues Leibs, 2007, December. For things that are truly important to the company, management should set goals, establish metrics, and then monitor progress against them Leibs, 2007, December. Thus, sustainability reports will help establish processes for gathering and reporting data Leibs, 2007, December. This means companies will become less focused on the report itself and more focused on the reporting process, thereby conceiving of the act of producing sustainability reports as part of a continuous activity that is as critical to running the business as it is to selling the business Leibs, 2007, December. In addition to providing more information to customers and investors, the process for producing sustainability reports could yield another benefit by providing more information to management for decision making purposes Leibs, 2007, December. Therefore, capturing sustainability data more efficiently can make the 35 sustainability reporting process function more like traditional performance management reporting and give management more current information, which they can use to make decisions about emissions, energy usage, and other critical business matters Leibs, 2007, December.

2.4.5 Relationship between GCG and Sustainability Reports

At present companies tend to focus on sustainable development as well as sustainability, which brings with it changes to the corporate culture as well as society. Sustainability has three important dimensions for all companies: economic growth, social responsibility and responsibility for the environment. The social and environmental responsibility, however, cannot become separated from economic growth. Profitability and growth create jobs and wealth; companies have to continue to provide products and services that people need. Sustainability is therefore a strategy of the process of sustainable development. It acquires special importance when the process helps people progress toward sustainability or may, on the contrary, dissuade them from engaging in the process. Sustainability is the ability to sustain the quality of life or the ability to maintain quality, which means that each generation has a responsibility for the quality of life and needs to continue improve it. Sustainability in connection with the business environment has become part of the general awareness as a result of environmental approaches implemented in companies. Corporate sustainability is a strategic approach focusing apart from the effectiveness and efficiency also on the company productivity, on the creation of 36 value for the owners on competitiveness, as they follow from the environmental, economic and social dimensions. The defining of sustainability relates to the concept of the strategy known as the strategy of sustainable development, according to the authors Hart, 1995; Shrivastava, 1996; Stead Stead, 1995 in relation to the company. The strategy of sustainability of the company currently includes a broad approach aimed at the integration of economic, environmental and social dimensions. Based on the most extensive study on CEOs so far Accenture, 2010, 93 of them believe the sustainability issues will be important for future success of companies. In 2007 72 of CEOs believed that sustainability issues should be fully integrated into the strategy and running of the company, while in 2010 this belief is expressed by 96, which proves the increasing interest in sustainability. The environmental, social and economic factors and Corporate Governance are at the heart of the corporate and business strategies, they are part and parcel of daily operations, stimulate work for success and work as an indicator of threat and risk and push for seizing opportunity, and of course they should become part of the voluntary corporate reporting on the assessment of links between the environmental and economic assessment of performance, the social assessment of performance and the relation to Corporate Governance. Although there is no direct relation between the environmental performance and that of Corporate Governance Salo, 2008, we can state that the environmental performance and the Corporate Governance performance individually contribute to the general performance. 37 There is a fuzzy relation, too, between the environmental and the economic performance Horváthová, 2010. The relation of the social and Corporate Governance performances and the relation of the social - environmental performances and the economic performance should be the subject of further research. It is important to create measurable and relevant goals of sustainable development and suitable metrics, and further integrated reporting on the financial and non-financial information on the internet basis. The companies who provide insufficient and incomplete information, while its delayed provision is also a flaw, are regarded by investors as involving greater risk and in consequence they are inclined to invest smaller amounts in such companies Bartes,1994.The solution is offered by the reporting integrating the financial and nonfinancial indicators. The same principles should be applied to both the financial and nonfinancial indicators. In both cases they should be relevant, measurable, comparable, motivating and clearly understandable.

2.4.6 Sustainability Report in Indonesia

Sustainable Reporting is a report containing the companys performance in three aspects, namely economic, environmental, and social. The objective of this report was to be the assessment of whether a company has been able to overcome issues related to sustainability, such as energy savings and conversion. According to data from the National Center for Sustainability Reporting NCSR, the development of a sustainability report in Indonesia is quite good. In 2012, there were approximately 40 companies that make sustainability reports 38 with reference to the reporting standards issued by the Global Reporting Initiative GRI. The number of companies that make sustainability reporting in Indonesia is the highest in Southeast Asia. In Malaysia, the number of reporting issuer is only about 10 companies. Meanwhile, in Singapore there are 15 companies NCSR, 2012. Indonesian companies have gone public have an obligation to make a sustainability report in accordance with the Article 66 paragraph 2 of Law No. 40 Year 2007 regarding Limited Liability Company. Through the application of Sustainability Reporting company is expected to develop in a sustainable growth based on business ethics The National Development of Indonesia is not separate from the Sustainable Development objective which is “To fulfill the need for humans now without demolishing the capability of future generations in fulfilling their needs” Brunt land Report 1987. For this reason, the strategy of development must be based upon 3 three main pillars in sustainable development, which are: Environment, Social and Economic”. This strategy has been conducted by the business community with its concept of Corporate Social Responsibility CSR or in a broader sense can be described as Corporate Sustainability CS. For the purpose of assisting, developing, measuring and reporting of the implementation of CSR Corporate Sustainability CS there is a need for a independent organization. That is why the “National Center For Sustainability Reporting NCSR” has been established which comprise of corporations, as an Organizations and professional individuals which have the vision and commitment in implementing and developing Sustainable Development in Indonesia. 39 NCSR has been declared on June 23, 2005 by 5 five major independent organizations which are the Indonesian Management Accountants Institute IAMI prev. IAI-KAM, the Indonesian-Netherlands Association INA, National Committee on Governance KNKG, Forum for Corporate Governance in Indonesia FCGI and the Public Listed Companies Association AEI.

2.5 Previous Research

This literature review tries to find out the research conducted in this field and to what this thesis could contribute. The following researches have been conducted in this field:

2.5.1 Analisis Pengaruh Good Corporate Governance Gcg Terhadap

Kualitas Pengungkapan, Sustainability Report Abdul Aziz, Desember 2014 This research aims to analyze the characteristics of good corporate GCG in a company that can affect the quality of sustainability reporting disclosure on sustainability report or Sustainability Report corporations in Indonesia. Factors characteristics of good corporate governance which is used are, the size of the Board of Commissioners, the proportion of Independent Commissioner, the size of the Audit Committee, managerial ownership, institutional ownership, share ownership is concentrated, and the size of the company. Results from this study indicate that factors managerial ownership significantly influence the quality of disclosure of SR in Indonesia, while the size of the Board of Commissioners, the proportion of Independent Commissioner, the size of the Audit Committee, the shareholding institutional stock ownership is 40 concentrated, and the size of the company does not significantly influence kualiatas disclosure of SR Indonesia.

2.5.2 Corporate Governance and Sustainability Alena Kocmanová, Jiří

Hřebíček, Marie Dočekalová, 2011 The paper focuses on Sustainability and Corporate Governance from the point of view of integration and, in connection with the measurement of corporate performance, Corporate Sustainability Reporting is also gaining in importance. In accordance with the OECD principles OECD Principles, 2004 it is assumed that the effectively functioning Corporate Governance system within the company and across the whole economy assists to create the confidence and trust necessary for existence of the market economy. A very wide spectrum of sectors coming under the Corporate Governance also appears when trying to define this term succinctly. Integrated with sustainability which is defined as corporate strategy, long-term corporate goals are followed along with effectiveness, performance and competitiveness by means of incorporating of economic, environmental and social aspects into corporate governance. The end of the results show that Corporate governance is understood as the key element in achieving economic performance and growth ensuring increased trust of the investors. It covers a wide range of relationships between the company management, governing bodies, stakeholders and other parties with justified interests. It encompasses a widely varying range of areas, which is also manifested by an effort to create a concise definition of the term 41

2.5.3 Corporate Governance, Sustainability and the Assessment of Default

Risk Christina James-Overheu, Asian Journal of Finance Accounting This paper investigate s whether the quality of a firm’s corporate governance practices and its sustainability disclosures are inversely related to its assessed default risk. It is expected that high reported standards of corporate governance will reduce th e assessment of a company’s default risk by lenders, underwriters and ratings agencies, and therefore reduce the cost of debt for such companies. A corporate governance index based on annual report disclosures was developed to rate each company ’s corporate governance quality. Derivation of this index was centered on corporate governance indicators suggested by prior research and best practice; particularly the Australian Stock Exchange “Principles of Good Corporate Governance and Best Pract ice Recommendations”. The assessment of def ault risk is captured by a firm’s individual credit rating supplied by Standard and Poor ’s. Our results indicate that neither annual report disclosures about corporate governance practices nor sustainability disclosures are significantly related to assessed default risk when firm size is controlled.

2.6 Theoretical Framework

The logical framework for the following research will be used to elaborate a structure for the research, to specify the results and to define the activities, which will be required in order to achieve the respective results. 42 Table 2.1 Matrix of the Logical Framework Summary Objective Indicators Verification Method Important Assumption Goal To contribute to social, economic and environmental improvement Number of Companies that Issue Sustainability Report All Companies listed in IDX Increasing of welfare of society, environmental and economic Purpose To observe and clarify the Impact of Corporate Governance to the quality of Sustainability Report disclosure Sustainability Report Disclosure The sustainability Reports and Annual reports. Improving and create awareness for others companies to disclose Sustainability Results GRI G3 Index ratio The ratio expressed in numbers Compliance to GRI G3 indicator All Indonesian companies get compliant with the GRI guidelines in their sustainability reporting GCG Component Ratio The ratio expressed in numbers Annual report of company Better Corporate Governance to implement the better sustainable development Interdependency between GCG and Sustainability Report Disclosure The ratio expressed in numbers The combination of compliance GCG Components and GRI G3 Corporate Governance has influence relationship to the Sustainability 43 Summary Objective Indicators Verification Method Important Assumption indicators Report Disclosure Activities Select companies with sustainability report Sustainability report that is published in website company Documentation of the planning of the research proposal Quality of sustainability reporting could be more completed Check applicability of GRI G3 Guideline Application of GRI cross index Documentation of the planning of the research proposal All companies compliance all indicator of GRI Elaborate index indicators and check the indicators of Sustainability reports and follow the GRI G3 The GRI G3 Indicators Documentation of the planning of the research proposal All companies compliance all indicator of GRI Evaluate the companies checklist The GRI G3 Indicators Documentation of the planning of the research proposal All companies compliance all indicator of GRI Compliance ratio calculating The ratio expressed in numbers Documentation of the planning of the research proposal All Indonesian companies could be compliant as GRI guideline in reporting Sustainability. Select the GCG components The ratio expressed in numbers Documentation of the planning of the research proposal Company with Good Corporate Governance can influence the Quality of Sustainable Report The statistical process The Statistical express the number Documentation of the planning of the research proposal The GCG has significant with Quality of Sustainability Report The analysis of the results from the statistical The significance result is Documentation of the planning of the research The GCG has significant with Quality of 44 Summary Objective Indicators Verification Method Important Assumption process. express by number proposal Sustainability Report Source: Processed from secondary data Figure 2.1 Theoretical Framework to contribute for social economic and environmental improvement of on nation or economy. to prove the relationship between sustainability reporting and financial report. GRI G3 Index ratio Select companies with sustainability report Check applicability of GRI G3 Guideline Elaborate index indicators and check the indicators of Sustainability reports and follow the GRI G3 Select the GCG components Independent Variable Evaluate the companies checklist GCG Component Ratio Dependent Variable Compliance ratio calculating 45

2.7 Hypothesis Development

The Hypothesis is considered as a tentative statement that proposes a possible explanation to some phenomenon or event. Based on the literature review previously, the hypothesis development can be formulated as: 1. H1: The Board of Commissioners influence the quality of Sustainability Report Disclosure 2. H2: The Independent Commissioner influence the quality of Sustainability Report Disclosure 3. H3: The Audit Committee influence the quality of Sustainability Report Disclosure 46

CHAPTER III RESEARCH METHODOLOGY

3.1. Scope of Research

This research is quantitative research with the steps of causality relationship and evaluation. Causality is a type of relationship, which can be seen from the characteristics of the relationship between independent and dependent variables. When the dependent variable explained or influenced by independent variables, it can be stated that variable X cause variable Y. The scope of this research is limited to sustainability reports and annual report of 5 Indonesian nationally listed companies within 2009 and 2014. In total there are 30 sustainability reports and 30 annual reports. These reports and statements have been coded, analyzed and scored as content analysis. The target samples of this research are Indonesian companies that are listed in the Indonesian Stock Exchange. This research is using purposive sampling method. The reason for this sampling method is that sustainability reports are established voluntarily and not all Indonesian companies are presenting their sustainability reports.

3.1.1 Dependent Variable

In this research, there is only one dependent variable, and it is Sustainability Report which connected with the GRI G3 indicator. Subsequently, the GRI G3 guidelines are applied to measure the compliance of Sustainability reporting disclosure of company. 47 The GRI G3 indicator consists of the following indicator groups, which are the social performance indicators, the environmental performance indicators and the economic performance indicators. In detail there are 40 items for social performance indicators, 32 items for environmental performance indicators and 7 items for economic performance indicators. In total 79 items will be examined in each company’s sustainability report. The index for testing the compliance of Sustainability Report by follow as formulation: Description: n = the total indicators in sustainability report that compliance with GRI G3 k = Total of GRI G3 indicator 3.1.2Independent Variable In this research, there are 3 independents variables. It is the size of Board of Commissioners, the proportion of Independent Commissioners, and Audit Committee, which is the part of Good Corporate Governance Components. 4. The size of Board of Commissioners The size of Board of Commissioners in this research is the total number of members of the Board of Commissioners in a company. Board of Commissioner Size is calculated by counting the number of members of the Board of Commissioners in a company mentioned in the annual report.

5. The proportion of Independent Commissioners

Independent commissioner is a member of the Board of Commissioners that is not derived from affiliated parties. Independence of the �� � = n k x 100 48 Board of Commissioners referred to this research, is the proportion of Independent Commissioners in a Board of Commissioners. Independence of the Board of Commissioners is measured by the ratio or percentage between the numbers of the Independent Commissioner members as compared to the total number of members of the Board of Commissioners.

6. The size of the Audit Committee

Size of the Audit Committee is the amount of number of Audit Committee within a company. Audit committee size is calculated by counting the number of members of the Audit Committee in the annual reports of the companies listed in Indonesian Stock Exchange IDX. Table 3.1 Operational Variable Variable Measurement Scale Dependent Variable: Sustainability Report Amount of item that disclosure as follow by GRI G3 indicators in Sustainability reporting. If the company disclosure as follow the indicator of GRI G3 is obtained score one one, but if not disclosure is obtained score zero 0. �� � = n k x 100 Ratio Independent Variable : The size of Board of Commissioners Board of Commissioners size is calculated by counting the number of members of the Board of Commissioners in a company mentioned in the annual report. Ratio 49 Variable Measurement Scale The proportion of Independent Commissioners The size of the Audit Committee Independence of the Board of Commissioners is measured by the ratio or percentage between the numbers of the Independent Commissioner members as compared to the total number of members of the Board of Commissioners. Audit committee size is calculated by counting the number of members of the Audit Committee in the annual reports of the companies Ratio Ratio Source: Processed from secondary data

3.2. Sampling Method

Sampling method is kind of method that taken data from population. A sample is a subset of the population. A sample consists of the member of population. The sample in this research includes companies listed at the Indonesian Stock Exchange within 2009 - 2014. The reason for choosing the period 2009 until 2014, it’s due to some companies listed in Indonesia Stock Exchange has just begun to disclose the sustainability report with good corporate governance disclosure start in 2005. This research use purposive sampling, which means determine in advance the number of samples to be taken, then the sample selection is done based on certain objectives. Start from 2005, it was a primary for some companies to disclose their sustainability reporting as a voluntary and follow in according to GRI guideline. This research will conduct a purposive sampling. Regarding to the 50 population in this research must meet the following criteria: 1. The Issuer has published sustainability reports within 2009 until 2014 2. The Issuer applies GRI cross index as the guidance for the sustainability report 3. The Issuer has published and disclosed the good corporate governance information. 4. The Issuer has published the respective sustainability reports on the company’s website

6.3. Data Collection Method

This research is using data from secondary sources, which was published by the companies such as reports on the company’s website, annual reports of company or media reports. The data used in this research is secondary data. Secondary data is data that available from previous research, case studies, and library records, online data, company websites, and the internet in general Sekaran and Bougie, 2010. The data collection method in this research is a panel data. Panel data analysis is a method of studying a particular subject within multiple sites, periodically observed over a defined time frame. It means the combination of time series with cross-sections can enhance the quality and quantity of data . The data in this research is obtained from respective companies website and Indonesia Stock Exchange IDX. The Annual Report data from the sampled Companies has been collected from the respective websites, and the sustainability reports are taken from respective companies website and as appropriate with population criteria. The good corporate governance reports have been taken from 51 the sustainability report SR from GRI Index. The research will examine 30 sustainability reports and Annual Report databases from 5 companies listed in Indonesia Stock Exchange in the period of 2009 to 2014 .

3.4. Analysis Method

The method of analysis data in this research is using statistical calculations; the name of application is SPSS Statistical Product and Service Solutions. The emphasis will be put on the frequency of sustainability report disclosure in sustainability report. The content analysis comprises 30 sustainability reports and annual reports which coded, analyzed and scored. The limitation of the content analysis is to identify the disclosure of social information under each theme. Each type of information will be scored by using numbers. Zero numbers for no disclosure through the GRI G3 in sustainability reports, 1 for element that disclosure as guided by GRI G3 indicators. The variables in this research will be tested through the method of descriptive statistical and hypothesis testing, followed as:

3.4.1. Descriptive Method

Descriptive statistical testing in this research basically is a process transformation research data in a form of tabulation in order that can be easier to understand and interprets. Tabulation in generally is used by researcher to obtain information about characteristics of primary variable in research. The measurement applied in this descriptive statistical testing depends on the type of scale of measurement. The descriptive statistical testing obtains a picture or describes data that can be seen from median, mean, mode, standard