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The Board of Directors is also as the Corporate Governance guarantor. Shareholders elect the Board of Directors to oversee management and to
assure that stakeholders‘ long-term interests are served. Through oversight, review, and counsel, the Board of Directors establishes and promotes business
and organizational objectives. The Board oversees the company‘s business affairs and integrity, works with management to determine the company‘s
mission and long-term strategy, performs the annual Chief Executive Officer CEO evaluation, oversees CEO succession planning, establishes internal
controls over financial reporting, and assesses company risks and strategies for risk mitigation. Naciri, 2008 pg. 24
c. The board of Independent Size BOI
The independent board is an important point in corporate governance principles that repeatedly examined in many research. Nowadays, it is widely
recognized that independent board play an important role in a sound governance structure California Public Employees, 2010 cited in Yusuf,
2013. According to OECD GC Principles, the board should be comprised of at least a majority of ―independent directors‖.
Board should consider assigning a sufficient number of independent board members capable of exercising independent judgment to task where there is a
potential for conflict of interest OECD, 2004. Examples of such key responsibilities are ensuring the integrity of financial and non-financial
reporting, reviewing of related party transaction, nomination of board member
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and key executives and board remuneration OECD, 2004. When investigating the composition of board of directors, we can see how different
the company describes the definition of ―independence‖ which is disclosed and observed in its annual proxy statement. Then their compliance will be
evaluated if they follow the rule at least one third directors of the board are independent directors.
d. Ownership Structure
The ownership structure is the shareholding in the company, particularly the number of majors either individually or together will determine the
extent and intensity control to management. Ownership structure is the percentage of shares held by the insider and the outsider shareholder. Insider
party, i.e. shareholders who are aligned as a director and commissioners. Outsider party, i.e. shareholders that have by the institutions, individuals and
other outside the company. Company ownership can be seen from the point of the concept of corporate governance, as the owner of an external mechanism,
which is strongly associated with the commissioners and directors Anderson et al 2003.
The firm‘s ownership structure can have a large impact on the firm‘s control structure, innovation culture and resource allocation. If the firm has
shareholders, different existing or potential shareholders can have different qualities as sources of capital andor providers of ancillary services such as
control services or services designed to foster innovation. Ownership concentration, for example, if the firm has a small number of entrepreneur-
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shareholders each committed to innovation, the firm is more likely to have a strong innovation culture. The firm is less likely to have a strong innovation
culture when it has a highly dispersed share ownership structure. Ownership concentration is thus one of the factors that can bring benefits. Large
shareholders are better at fostering innovation compared with small shareholders Mantysaari, 2012
Agency problem is problems arising from the parties involved have different interests with each other. The ownership structure is a mechanism to
reduce the conflict between management and shareholders Faisal, 2004. So the agency problem can be mitigated by the presence of the ownership
structure, due to the presence of structured ownership structure, believed to have the ability to influence the future course of the company that may affect
the agency costs incurred by the company. Ownership structure can be individual investors, government, and private institutions. The ownership
structure is divided into several categories. Specifically ownership structure category includes ownership by managerial ownership and institutional
ownership.
1 Managerial Ownership MO
Managerial ownership is ownership of shares that management receives in other words the management as well as a shareholder King Santor, 2009
According to Jansen Meckling 1976 one way in order to reduce the conflict between the principal and the agent can be done by increasing
managerial ownership of a company. That means that managerial ownership
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in a company will encourage pooling of interests between principal and agent so that managers act in accordance with the wishes of shareholders.
Managerial ownership can also align the interests between managers and shareholders so that managers will be careful in taking decisions because they
directly share in the benefits and impact of the making the wrong decision Faisal, 2004.
The greater the proportion of managerial ownership in the company, the managers tend to try harder and motivated to create the optimal company
performance because managers have an obligation to maximize the welfare of the shareholders, yet on the other hand, managers also have an interest to
maximize their welfare Faisal, 2004. The Manager will seek to reduce conflicts of interest resulting in lower agency costs and can reduce the
tendency of managers to perform an opportunistic action.
2 Institutional Ownership IO
Institutional ownership is ownership of shares owned by domestic institutions, foreign institutions, government institutions such as insurance
companies, banks, investment companies and other. Institutional ownership may indicate the presence of institutional investors that strong corporate
governance mechanisms which can be used to monitor the management of the company Tarjo, 2008 cited in Febriyanto, 2013. The ownership structure of
public companies in Indonesia is concentrated in institutions. Institutions which mean the owner of a public company in the form of institutions, not on
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behalf of the owner of individual private Anderson et al 2003. The majority of institutions is a Limited Liability Company. It is the Ownership by
institutional investors is likely to encourage more optimal monitoring the management performance, since share ownership represents a source of power
that can be used to support or otherwise of the management performance. Jensen Meckling 1976 suggest that institutional ownership has a very
important role in minimizing agency conflicts that occur between managers and shareholders.
e. Firm Performance
