CEO Determination on Indonesian Coal-Based Enterprises
Performance
HABIBULLAH JIMAD, ROSLINA, FAJRIN SATRIA DWI KESUMAH
Department of Management,
University of Lampung,
Bandar Lampung City,
INDONESIA
Abstract: - The continuous increase in Indonesia's coal production shows an increase in the firm performance.
This study aims to examine the determination of CEO characteristics on coal-production-based companies in
Indonesia. Using data from coal production sub-sector companies in Indonesia, this study applies a panel data
regression analysis method with a total sample of 15 companies from 2016 – 2020. The results show that CEO
attributes such as CEO Duality have a significant positive effect on company performance while CEO Tenure
and CEO Ownership have no effect on company performance, but CEO Education has a significant negative
effect on company performance and the composition of external commissioners has no significant effect on the
company's performance.
Key-Words: - Determination CEO, CEO Attributes, Coal Based Companies, Firm Performance
Received: October 22, 2022. Revised: April 5, 2023. Accepted: April 29, 2023. Published: May 11, 2023.
1 Introduction
Coal is still the world's main energy source, even
though the world is currently trying to reduce its
use, [1]. According to [2], currently coal is an
energy source used as fuel for power plants which
produces 37% of global electricity, and by 2040 it is
predicted to produce 22% of the world's electricity.
Meanwhile, the Southeast Asian region itself is
predicted to generate 39% electricity by 2040, [2].
Furthermore, empirical research conducted by [3],
found that by 2030 coal production in China will
reach peak production of up to 5,000 MT, where
coal is also the main energy source for China. In
Pakistan, according to, [4], Pakistan's coal reserves
which reached 185.175 billion tons significantly
increased the social, economic and energy of the
Pakistani people.
Furthermore, the development of Indonesian coal
production for the 2009-2018 period experienced a
considerable increase, with production
achievements in 2018 of 557 million tons. Of the
total production, the export portion of coal reached
357 million tons (63%) and most of it was used to
meet the demands of China and India. The high
number of Indonesian coal exports makes Indonesia
one of the largest coal exporters in the world.
Meanwhile, domestic coal consumption reached 115
million tons or less than the domestic coal
consumption target of 121 million tons. One of the
factors causing the lower realization of coal
consumption is the operation of several 35,000 MW
steam power plants (PLTU) not according to plan
and there are several industrial activities that have
decreased, [5].
The increase in domestic coal production
certainly depends on the performance of companies
engaged in coal production. Indonesian Stock
Exchange (IDX) noted that in the first semester of
2021, the majority of the largest coal mining issuers
reported an increase in revenue, although some
experienced a decrease in sales volume, [6]. PT
Adaro Energy Tbk (Emiten code: ADRO), for
example, recorded operating revenues of US$ 1.56
billion in the first semester of 2021, up 15% year-
on-year (YoY). The increase in topline was mainly
due to an increase in the average selling price (ASP)
of 25%. The improvement in coal prices also helped
to raise the average selling price of PT Indo
Tambangraya Megah Tbk (Emiten code; ITMG)
during the first semester of 2021. ITMG recorded an
average coal price of US$ 74.7 per ton. This average
price rose 34% from the same period the previous
year which was only US$ 55.7 per ton. Like ADRO,
the increase in ASP occurred when ITMG recorded
a decrease in sales volume. During the first half of
2021, ITMG sold 9.0 million tons of coal, a
decrease of 18.91% from coal sales in the same
period the previous year of 11.1 million tons. With
the increasing income of most coal companies in
Indonesia, it can be correlated as one of the
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DOI: 10.37394/23207.2023.20.90
Habibullah Jimad, Roslina, Fajrin Satria Dwi Kesumah
E-ISSN: 2224-2899
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determinants in increasing company performance,
[7].
In the literature of previous studies, there have
been many studies examining the factors that affect
company performance, [8], [9]. One of the crucial
factors influencing company performance is the
characteristics of the chief executive officer (CEO),
[10], [11], [12]. The CEO plays an important role in
company decision making, so the success or failure
of the company is almost always associated with the
characteristics of the CEO itself. Furthermore, the
CEO's central role is to drive growth and manage
the complexity of the company as well as to control
costs effectively and efficiently, [8]. The recent
economic recession due to the Covid-19 Pandemic
has put the role of top managers in the spotlight
because they are required to make strategic
decisions regarding the effectiveness of corporate
governance in the face of the global economic
recession for the sake of the company's
sustainability, [13]. Therefore, the specific objective
of this research is to examine the determination of
the characteristics and attributes of the CEO on the
performance of coal sub sector companies listed on
the Indonesia Stock Exchange (IDX). The
characteristics of CEOs that will be tested in this
study are CEO Duality, CEO Tenure, CEO
Ownership, CEO Education, and the structure of the
board of commissioners.
2 Literature Review and Hypothesis
Development
2.1 CEO Duality and Firm Performance
The first determinant tested and analyzed in this
study is CEO Duality. This determination of CEO
Duality on the company's performance has been
widely studied in previous studies that refer to the
basis of stewardship theory. This theory was first
introduced by [14], which stated that a company
manager is not motivated to fulfill his own interests,
but is more likely to improve the quality of the
company's overall performance. Thus, CEO Duality
in this theory can be used as the basis for
formulation and strategy in developing a more
consistent company, [14]. A study conducted by
[15], proved that CEO duality has a large and
significant influence on increasing company
performance. Likewise, another study conducted
recently revealed that CEO duality has a significant
influence on company performance as measured by
the ROA ratio, [16]. Meanwhile, in the context of
Agency Theory, [17], stated that CEO Duality has a
bad influence on company performance when the
company is mature, because the CEO can
compromise and control his own performance.
Similarly, the authors in [18] revealed a negative
relationship between the dual role of CEOs on the
performance of small companies in China. Thus, the
hypothesis built in this study is as follows:
H1: CEO Duality has a positive influence on
company performance.
2.2 CEO Tenure and Firm Performance
There is a debate among scholars regarding the
CEO's tenure in a company. In the stewardship
theory, it is revealed that the longer a CEO leads the
organization, the more the CEO understands the
culture and operations of the company which results
in increasing company performance. Furthermore,
the relatively long periodization makes the CEO
increasingly have a higher sense of ownership of the
company so that the company tends to be able to
continue to grow, [19]. He also tested the interface
model as an important intervening mechanism
between CEO tenure who is part of the Top
Management Team (TMT) and the model shows
that CEO tenure with its influence has a significant
effect on decision-making risk in TMT which is
oriented towards innovative initiatives. Furthermore,
CEO tenure will increase the value of the company
in line with the increase in compensation for the
CEO, [20], [21]. Study in the last decade conducted
by [22] proved that CEO Tenure has a positive
impact on company performance mediated by firm-
employee and firm-customer relationship strength.
On the other hand, some scholars have the view
that CEO Tenure actually has a bad influence on the
quality of company performance, [23], [24], [25],
revealed that investors prefer to place their funds in
companies with shorter executive's tenure to get
higher yields because they are seen as having a
better level of financial stability. Furthermore, the
authors in [26] argued that there are two empirical
reasons from the results of his research which state
that CEO tenure has a negative impact on Corporate
Social Responsibility (CSR) performance, namely
CEOs have incentives to use CSR performance as a
signal of their ability to reduce career problems. and
CEO tenure issues. Based on previous studies, we
build the second hypothesis as follows:
H2: CEO tenure influences company
performance
2.3 CEO Ownership and Firm Performance
The authors in [27] revealed that one way to reduce
the impact of agency problems is to increase CEO
share ownership. The greater the percentage of
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shares owned by the CEO in the company is
believed to improve the company's performance,
[28]. The authors in [10] argued that there is a
significant positive relationship between CEO
Power and company performance. In this study, it
was revealed that the interaction between CEO
characteristics and organizational variables has
important consequences for increasing company
performance. A recent study, [16], found that the
performance of companies in India will increase
with greater CEO share ownership. Then the third
hypothesis that we build is as follows:
H3: CEO Ownership has a positive effect on
company performance
2.4 CEO Education Background and Firm
Performance
There is no basic rule of education level as the main
requirement to become a CEO, since multinational
companies have CEO with different educational
backgrounds. CEO who has a graduate education
background in management, economics or business
are expected to improve managerial functions and
can easily make the right decisions to improve firm
performance. The Study in [8] revealed that
companies that have CEO with MBA, masters and
doctoral educational backgrounds can increase
company value in Saudi Arabia. While the authors
in [12] explained the educational background of a
CEO has an important role in improving firm
performance, because the education level of a CEO
can prove CEO's connections and abilities which
will ultimately have an impact on Firm
performance. The next hypothesis that is built is:
H4: CEO Education has a positive effect on
company performance
2.5 The Structure of the Board of
Commissioners and Firm Performance
In agency theory, the greater number of independent
commissioners in a firm, the better in overcoming
agency problems between principals and agents,
[29]. The study [30] proved that the more dominant
the number of independent commissioners, the more
power the board of commissioners will put pressure
on CEO to improve the quality of corporate
disclosure. In other words, the diversity of outsider
supervisory can encourage TMT to act objectively
and be able to protect all shareholders, [31]. Thus,
independent directors who do not have a
relationship with the firm are expected to improve
the quality of supervision carried out by TMT so
that they can have a positive influence on Firm
performance, [32]. Our final hypothesis is
constructed as follows.
H5: The Board of Commissioners affects the
company's performance
3 Research Methods
This study extracted data published in each annual
report of coal sub sector companies listed on the
IDX from 2016 to 2020. According to the latest
report in [6], there are 33 companies coal sub
sectors listed on the IDX, but in this study the
sample of companies will be limited to the coal sub
sector with the specifications of the coal production
industry, and which publish annual reports from
2016 to 2020, so that the total companies that are
sampled in the study are 15 companies. Data
analysis used panel data regression analysis which is
a combined analysis technique of cross section and
time series data. The econometric model that we
built in this research is as follows.
Formula (1):
Where is firm performance ratio through
ROA in firm i and year t; is CEO Duality in
firm i and year t; is CEO Tenure in firm i and
year t; is CEO Education Background in firm
i and year t; and is Ratio of Independent
Commissioner in firm i and year t; = Error term.
In panel data regression, there are four models
that can be used. These models include the pooled
OLS model, the least square dummy variable
(LSDV) fixed effects model, the within-group fixed
effects model and the random effect model, [33].
The selection of the model to be used is through
selection by testing the model specifications. There
are two specification tests, namely fixed effects, or
random effects.
The specification test aims to determine the
panel data analysis model that will be used through
the Chow Test, Hausmann Test, and the Lagrange
Multiplier (LM) Test, [33]. Furthermore, the
feasibility of the model built will also be tested or in
this case it will test each hypothesis that has been
built through a simultaneous significance test (F
test) and individual parameter significance test (t
test).
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4 Results and Discussion
In this study, the analysis begins with a description
of some basic statistical values for all tested
variables which are presented in Table 1. The
statistical descriptions that will be described are the
average, minimum, and maximum values. The
average value for ROA in coal production sub-
sector companies in Indonesia is 7.49% during the
study period. This ROA percentage indicates that
coal production sub-sector companies are on
average able to generate a positive return to assets
ratio during unstable economic conditions due to the
Covid-19 Pandemic. Furthermore, the average value
of CEO Duality is close to 0, which means that most
CEOs do not have closeness to the board of
directors, commissioners, and shareholders or in
other words, the average company that is the sample
of this study does not have leadership duality. The
variable tenure of CEOs in Indonesian coal
production sub-sector companies is an average of 7
years, which means that many companies retain
CEO leadership for more than 1 period. For the
average CEO education variable statistically has a
mean of almost 50%, which indicates that half of the
COEs in the sample have a postgraduate education
level. Meanwhile, the level of CEO's share
ownership in the companies he leads is on average
very low, which is only 3.27% and the number of
independent commissioners in each company is on
average 41.32 percent.
Meanwhile, the minimum ROA value is negative
0.0984 and the maximum is 0.456. This negative
ROA value is believed to have occurred at the peak
of Covid-19 cases that occurred in 2020, so that
some companies were unable to generate profits on
their assets. The minimum tenure of the CEO is
under 1 year and a maximum of 28 years, and the
maximum value of shares owned by the CEO in the
company he leads is 54.03% who is also the owner
of one of the companies. The minimum percentage
of independent commissioners is 25%, which
indicates that every company has an external
commissioner to supervise the management of the
company.
Furthermore, to ensure that the model to be built
does not have a relationship between variables
(multicollinearity), Table 2 shows the correlation
between variables with fair value, which is below 80
percent, meaning that the variables in this study do
not have symptoms of multicollinearity.
Table 1. Statistical Descriptive
Variables
Mean
Std. Error
Median
Std. Deviation
Kurt.
Skew.
Min.
Max.
ROA
0.0749
0.0120
0.0470
0.1041
2.7848
1.3669
-0.0984
0.4560
CEO Duality
0.2533
0.0506
0.0000
0.4378
-0.6788
1.1576
0.0000
1.0000
CEO Tenure
7.4762
0.7908
7.0000
6.8483
1.5472
1.3227
0.0833
28.0000
CEO Education
0.4667
0.0580
0.0000
0.5022
-2.0364
0.1364
0.0000
1.0000
CEO Ownership
0.0327
0.0138
0.0000
0.1194
14.2969
3.9540
0.0000
0.5403
Board Structure
0.4132
0.0107
0.4000
0.0925
0.6849
1.0073
0.2500
0.6667
Table 2. Correlation Matrix
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Table 3. Output Fixed Effect Model (FEM)
Source: Processed data (EViews 10)
From the results of the Chow test and Hausmann
test on panel data regression, the statistically
recommended model is the Fixed Effect Model
(FEM) (Table 3). The FEM output is presented in
more detail as follows.
The model formed statistically has an R-Squared
of 77.23 percent, which identifies the five
independent variables tested that have a relatively
large effect on the dependent variable ROA and has
an F-statistic smaller than 0,05 which makes the
FEM model a significant fit model.
4.1 CEO Duality on Firm Performance
Statistical test results and econometric models show
a significant positive relationship between CEO
Duality on the performance of companies in the coal
production sub sector in Indonesia. The regression
coefficient of 5.04 indicates that on average and if
other variables are considered constant, if there is a
duality of leadership in the company, it will
statistically increase the company's performance.
This is in line with research conducted by [16], who
found that if the CEO of a company in India having
affiliation to company ownership will be more
efficient and better able to improve the performance
of the company. The same thing is also shown by
research, [34], which stated that the performance of
companies in France will increase significantly if
the company has a Duality CEO.
4.2 CEO Tenure on Firm Performance
This study found that CEO tenure has no effect on
company performance. The CEO who has led the
company for a long time does not mean that it will
increase the value of the company. Even the
coefficient of the CEO Tenure variable in the model
is negative, which indicates that the longer a CEO
leads the company, the lower the company's
performance. This result contradicts the findings in
[19], which stated that a CEO who has led an
organization for a long time will tend to have a
higher level of knowledge of the culture and
operations of the company, so that he will be able to
make a more effective contribution to improving
company performance. However, our research
supports the results of research in [35], which stated
that investors have a tendency to choose companies
with shorter CEO tenures on the grounds that these
companies have a better level of financial stability.
Likewise the authors in [25] described long service
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CEOs as having no influence on developing
companies.
4.3 CEO Ownership on Firm Performance
CEO share ownership in coal production sub-sector
companies in Indonesia in this study shows a
statistically insignificant relationship with company
performance. The results of this study are different
from previous studies which state that the greater
the CEO stock ratio, the greater the company's
performance, [10], [16], [27]. This is because in the
research sample companies only a few CEOs have
contributed share ownership in the company they
lead, so the percentage of share ownership does not
have a significant effect on company performance.
4.4 CEO Education on Firm Performance
The educational background of the CEO in this
study has a statistically significant effect on
company performance. This significance is
indicated by a p-value that is smaller than 0.05 and
has a regression coefficient of -9.41. This means
that companies with undergraduate educational
backgrounds are better able to improve company
performance compared to companies with CEOs
with postgraduate education backgrounds. This
study contradicts previous research conducted in
[8], [12], which stated that CEOs who have a
master's and doctoral education background can
significantly improve company performance.
4.5 Board of Commissioners on Firm
Performance
Panel data regression test shows that the proportion
of independent commissioners in a coal production
sub-sector company has no effect on the company's
performance. This is contrary to previous research
which found that the greater the proportion of
commissioners from external parties, the higher the
company's performance, [31]. The research states
that the commissioners from outside the company
will be more objective in conducting supervision
and evaluation so that it will indirectly improve the
company's performance.
5 Conclusion
As one of the coal exporting countries, the role and
background of the CEO in coal companies in
Indonesia is crucial in improving company
performance. This study found that CEO duality has
a very crucial role because it can improve company
performance. However, CEO tenure and CEO
Ownership do not significantly affect the
performance of coal sub sector companies in
Indonesia. Meanwhile, CEO Education has a
significant but negative effect on company
performance, which means that CEOs with non-
master's educational backgrounds are even more
able to improve company performance compared to
CEOs who have master's and doctoral degrees.
Furthermore, the composition of independent
commissioners in this study showed insignificant
results, so it can be said that the percentage level of
external commissioners in coal sub-sector
companies in Indonesia has no effect on increasing
company performance.
Acknowledgement:
The authors would like to thank Riset Indonesia
Terpadu (RIT) for the assistance in analysing data.
The authors would also like to thank Enago
(www.Enago.com) for the English language review.
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Contribution of Individual Authors to the
Creation of a Scientific Article (Ghostwriting
Policy)
-Habibullah Jimad carried out the analysis and the
discussion.
-Roslina and Fajrin Satria Dwi Kesumah carried out
analysis data and literature.
Sources of Funding for Research Presented in a
Scientific Article or Scientific Article Itself
No funding was received for conducting this study.
Conflict of Interest
The authors have no conflict of interest to declare.
Creative Commons Attribution License 4.0
(Attribution 4.0 International, CC BY 4.0)
This article is published under the terms of the
Creative Commons Attribution License 4.0
https://creativecommons.org/licenses/by/4.0/deed.en
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DOI: 10.37394/23207.2023.20.90
Habibullah Jimad, Roslina, Fajrin Satria Dwi Kesumah
E-ISSN: 2224-2899
984
Volume 20, 2023
