Syntax Literate: Jurnal Ilmiah Indonesia p–ISSN: 2541-0849 e-ISSN: 2548-1398
Vol. 9, No.
11, November 2024
BOARD
CHARACTERISTICS AND ESG PERFORMANCE: AN EMPIRICAL STUDY OF PUBLIC COMPANIES IN
INDONESIA
Josua Febrico
Renaldo Pane1, Yunieta Anny
Nainggolan2
Master of Business
Administration, School of Business and Management, Institut
Teknologi Bandung, Bandung, Indonesia1,2
Email:
[email protected]1,
[email protected]2
Abstract
This study examines the impact of board
characteristics on the environmental, social, and governance (ESG) performance
of publicly listed companies in Indonesia. Focusing on firms listed in the
KOMPAS100 index, the research explores how board composition, including the
number of directors and commissioners, gender diversity, independence, the
presence of foreign members, and the sustainability committee, influences ESG
scores. Using data from Sustainalytics, financial reports, and sustainability
reports, the analysis includes control variables such as public shares, return
on assets, leverage, firm age, firm size, and state ownership. Significant correlations were discovered between the
characteristics of the board, the sustainability committee, and the ratings
related to environmental, social, and governance factors (ESG). Companies that
have larger boards, a higher proportion of female and independent directors,
and international members exhibit superior environmental, social, and
governance (ESG) performance. Sustainability committees contribute to the
improvement of ESG outcomes. The findings indicate that implementing
well-organized governance systems and having diverse board compositions are
essential for successfully managing sustainability. The study utilized regression models to examine the
influence of board features on ESG performance. Data from the KOMPAS100 index,
which includes prominent Indonesian companies, was used for analysis. This
empirical investigation offers useful insights into the ways in which corporate
governance frameworks can influence sustainable business practices in the
Indonesian context. Policymakers
are advised to establish policies that encourage the formation of board
diversity and sustainability committees. Corporate executives are recommended
to optimize the composition of their boards in order to align with
sustainability objectives, consequently enhancing environmental, social, and
governance (ESG) performance and attaining competitive advantages.
Keywords:
Board
Characteristics, ESG Performance, Sustainability Committees, Public Companies,
Indonesia
Introduction
The
need for sustainable business has acquired universal attention as a serious
worldwide concern. This realization has necessitated significant alterations in
the way that societies operate and make decisions about their future. The
increasing awareness of the urgent need for a shift towards sustainability is
becoming increasingly apparent due to the climate crisis and other
sustainability concerns
In recent years, there has been a
paradigm shift in the corporate world, wherein the primary objective of
organizations is no longer just generating profits, which has amplified the
business sector's recognition of the importance of their social responsibilities
towards the surrounding environment. There is a growing focus on sustainability
principles within the realm of business operations. ESG (Environmental, Social,
and Governance, abbreviated as ESG) performance attracts investor attention
Especially in Indonesia, where awareness of sustainability
continues to grow, public firms are expected to not only follow but also become
pioneers in the successful application of ESG principles. This is justified by
the Financial Services Authority Regulation No. 51/POJK.03/2017 on the
Implementation of Sustainable Finance for Financial Services Institutions,
Issuers, and Public Companies. In addition, the ESG assessment and analysis
that were carried out by IDX in collaboration with Sustainalytics released the
ESG score of listing firms in Indonesia, as shown on the IDX website. The
integration and implementation of sustainability at the firm greatly depends on
the corporate leadership, as seen by the composition of the BOD (Board of
Directors) and BOC (Board of Commissioners)
Studies analyzing the
relationship between board characteristics and ESG performance have been
conducted in multiple countries and also on a global scale
Given the reliability of an
index, it is often used as a baseline for experimental datasets that represent
a range of objectives, such as portfolio optimization, fundamental analysis,
cluster analysis, price (technical) analysis, and even analysis of indices
Research Objectives
1. To analyze the relationship of board characteristics, including the
size of the board, the proportion of foreign members, female members, and
independent members, on the ESG performance of Indonesian listed companies in
the Kompas100 index during the period of August 2023.
2. To examine the influence of sustainability committees on the board
and their effect on the ESG performance of companies listed in the Kompas100
index during the period of August 2023.
3. To provide actionable recommendations on optimal board structure to
enhance the ESG performance of firms listed in the Kompas100 index during the
period of August 2023.
Hypothesis Development
This research aims to examine how
the composition of a company's board influences its ESG (Environmental, Social,
and Governance) score. The analysis will consider various independent
variables, including the number of board members of the board of directors and
commissioners, the proportion of foreign members of the board of directors and
commissioners, female members of the board of directors and commissioners,
independent members of the board of directors and commissioners, and the
existence of a sustainability committee. Furthermore, control variables such as
public shares, return on assets, leverage, firm age, firm size, and company
type will be considered.
The
characteristics of a board play a crucial role in determining a company's ESG
performance. According to the agency theory, boards that include a variety of
members and are not influenced by external factors are more efficient in
supervising management, ensuring that their activities are in line with
long-term sustainability objectives, and minimizing conflicts of interest
between shareholders and management (Lewa et al., 2024). The stakeholder theory
highlights the importance of boards that represent a wide range of stakeholder
interests in order to enhance environmental, social, and governance (ESG)
performance by addressing the larger requirements of society (Freeman, 2023).
In accordance with resource-based theory, boards that have diverse expertise
can use their distinctive resources to improve environmental, social, and
governance (ESG) performance, which gives them a competitive advantage
(Varadarajan, 2023). The legitimacy theory suggests that having diverse boards
helps a company gain credibility by ensuring that its activities are in line
with societal expectations (Bengtson & Mossberg, 2023). The Triple Bottom
Line concept emphasizes that boards that prioritize economic, social, and
environmental factors can promote equitable and enduring corporate practices,
hence enhancing ESG performance. Furthermore, Indonesian regulations,
specifically POJK No. 51/POJK.03/2017, mandate that corporations adhere to
sustainable finance principles and disclose their ESG (environmental, social,
and governance) performance. These requirements highlight the board's
responsibility for ensuring compliance and improving ESG performance.
(Hypothesis
1) The
board characteristics and sustainability committee of a firm have an impact on
its ESG score.
Figure 1.
Conceptual Framework
Research
Methods
Research
Design
Figure 2. Research Design
Data
Collection Method
The sample of data used on this research is the data of
KOMPAS 100 stock index from major evaluation period August 2023 according to
the attachment to IDX Announcement No. Peng-00190/BEI.POP/07-2023 issued on
July 25, 2023. The sample dataset comprises 64 out of the total 100 equities
that are part of the KOMPAS 100 index. Out of the sample data, 35 firms were
eliminated since the ESG score data from Sustainalytics was not available for
them and 1 firm was eliminated since the annual report from IDX and the firm
website was not available.
The ESG score data is quantified and acquired
from Sustainalytics, a grading service for companies that is also utilized by
the Indonesia Stock Exchange. Subsequently, the remaining variables in the
sample data related to each of these companies were collected from the
financial reports and sustainability reports published annually by the
Indonesian stock exchange and corporate websites. The variables utilized and
data sources are concisely outlined in Appendix A.
Data
Analysis Method
To analyze the relationship
between ESG and board members, this research uses linear regression analysis.
Sustainalytics provides the ESG score, which serves as the dependent variable
in this research. The independent variables in this research include the size
of the board of directors (BODSIZE), the size of the board of commissioners
(BOCSIZE), the ratio of females on the board of directors (BODGender),
the ratio of females on the board of commissioners (BOCGender),
the ratio of independents on the board of directors (IndependentBOD),
the ratio of independents on the board of commissioners (IndependentBOC),
the ratio on the board of directors (ForeignBOD), the
ratio of foreigners on the board of commissioners (ForeignBOC),
and the presence of a dedicated sustainability committee within the company
(SC). The control variables in this research include the percentage of public
share (PS), the profitability factor (ROA), the liability factor (Leverage),
the age of the company since legal recognition (Age), the total assets of the
firm (SIZE), and the grouping of firms included as part of a stated owned
company or not (SOE). The research implements the following equation for linear
regression model analysis
The author applies
this regression model by incorporating variables such as:
Description:
Results and Discussion
Figure 3. Board Characteristics and
ESG Performance
Table 1. Summary of findings
|
Result |
Findings |
|
Base
regression |
·
A higher number of BOD have lowered
the ESG score. ·
A higher number of woman ratio on
BOD have lowered the ESG score. ·
The establishment of Sustainability
Committee has lowered the ESG score. ·
A higher number of foreign BOC have
increased the ESG score. |
|
Sub-sampling
1 |
· The establishment of Sustainability Committee has lowered
the ESG score. |
|
Sub-sampling
2 |
· A higher number of BOD have lowered the ESG score. |
|
Sub-sampling
3 |
·
A higher number of woman ratio on
BOD have lowered the ESG score. ·
The establishment of Sustainability
Committee has lowered the ESG score. |
|
Sub-sampling 4 |
- |
|
Sub-sampling 5 |
- |
|
Sub-sampling
6 |
·
A higher number of BOD have lowered
the ESG score. ·
The establishment of Sustainability
Committee has lowered the ESG score. ·
A higher number of foreign BOC have
increased the ESG score. |
The analysis reveals that increasing the
number of members on the board of directors (BODSize)
will adversely affect ESG performance. This aligns with the conclusions of the
research conducted by
The analysis reveals that adding more
female members to the board of directors (BODGenDiv)
will negatively impact ESG performance. These findings align with the results
of the study conducted by
Based on the performed analysis, it has
been found that increasing the number of commissioners from foreign countries (ForBOC) will have a beneficial effect on ESG performance.
The conducted study has observed a
detrimental effect on ESG performance when a company has a sustainability
committee (SC). This statement is in opposition to the conclusions drawn by
Based on the examined results, it can be
observed that the results are consistent with Hypothesis 1 (H1). The
composition of the board (including the number of BODs, the ratio of women on
BODs, and the number of foreign BOCs) and the existence of sustainability
committees do impact firm ESG scores. Nevertheless, the results indicate that
the influence varies depending on some characteristics that lead to a decrease
in ESG scores, whereas others result in an increase.
Business
Solution
From the research
findings it can be concluded that, in case of listing firms on Indonesia, it is
found that:
A
Higher Number of BOD Have Lowered the ESG Score
Agency Theory argues that a conflict of interest may arise between
management (the agent) and shareholders (the principal). As the number of BODs
increases, the likelihood of possible conflict may also increase. Increased
levels of BODs can result in more intricate coordination and
slower decision-making processes, thus impeding the successful execution
of ESG plans. Increased BODs can lead to a diffusion of decision-making and
supervision responsibilities, potentially reducing individual accountability.
This can diminish the emphasis on ESG initiatives.
Stakeholder Theory posits that
companies should take into account the concerns and interests of different
stakeholders when making decisions. Nevertheless, in practical application, an
increase in BODs may provide a greater number of conflicting interests and
perspectives, thereby diverting attention away from ESG objectives towards more
immediate or short-term advantageous priorities.
The Resource-Based Theory posits that
a company's competitive advantage is based upon its resources and capabilities.
However, an increase in the number of directors may necessitate additional
resources for board remuneration, benefits, and operations, thereby diminishing
the resources allocated for ESG activities. If the number of directors
increases without a significant increase in ESG-related expertise, the board's
ability to effectively oversee and lead ESG strategies might decline.
The Legitimacy Theory posits that
firms strive to acquire legitimacy from society by fulfilling social and moral
expectations. However, increasing the number of Board of Directors (BODs)
members can be perceived as a symbolic or ornamental effort if it lacks a
genuine dedication to Environmental, Social, and Governance (ESG) principles.
This could lead society to view it as only an attempt to meet statutory
obligations without actually implementing major changes.
Boards of a greater size might
demonstrate disagreement or a lack of unity in terms of ESG (Environmental,
Social, and Governance) priorities, perhaps resulting in diminished focus on
ESG efforts. The larger the number of members on the board, the more challenging
it gets to communicate effectively, which might impede the successful execution
of ESG policies and initiatives.
The likely solution is to enhance the framework and procedure of board
supervision in order to tackle problems related to coordination and
responsibility. An enhanced organizational framework enables greater
specialization of tasks and more streamlined decision-making processes.
Increasing the ESG-related knowledge and abilities of board members can enhance
their comprehension and commitment to ESG actions. By integrating ESG
commitments throughout the organization, the company will ensure that ESG objectives
are aligned with the overall corporate plan. Promoting a productive
decision-making process among board members is crucial for overcoming obstacles
to the adoption of ESG policies. Effective allocation of resources for ESG
efforts is crucial to provide the required support for the success of ESG
projects.
A
Higher Number of Woman Ratio on BOD Have Lowered the ESG Score
Agency Theory posits that a conflict of interest may arise between the
management, acting as the agent, and the shareholders, acting as the principal.
Under these circumstances, increasing the proportion of women in the Board of
Directors could fail to produce the expected benefits if there are particular
challenges in the decision-making procedure. Additionally, the experience gap
factor may arise when female members of the Board of Directors are relatively
new to their roles, leading to a lack of expertise that could impact their
ability to effectively implement ESG initiatives. Furthermore, there may be an
element of reluctance to change, where other members of the Board of Directors
may resist changes brought by women, thereby hindering the advancement of ESG
efforts.
Stakeholder theory posits that
companies should take into account the concerns and interests of diverse
stakeholders when making decisions. Female members of the Board of Directors
(BOD) may have the pressure of fulfilling various conflicting demands,
originating from both internal sources within the firm and external factors
such as societal and cultural expectations. These pressures have the potential
to divert attention from Environmental, Social, and Governance (ESG) objectives.
Although women serving on the Board of Directors (BOD) may have a strong
dedication to Environmental, Social, and Governance (ESG) issues, their
capacity to exert a meaningful impact on ESG policies may be hindered by
insufficient cooperation from male board members and existing corporate
structures.
Resource-Based Theory posits that a
company's competitive advantage is derived from its diverse set of resources
and capabilities. Insufficient allocation of resources by firms to assist
women-led ESG initiatives on the Board of Directors could make their efforts
useless.
Women's effectiveness in the Board of
Directors (BOD) can be greatly influenced by social and cultural variables.
Female directors may encounter cultural biases that interfere with their
capacity to effectively implement substantial changes, such as ESG efforts.
Women in particular environments may face constraints on their ability to make
important decisions within a corporation due to traditional gender role
stereotypes.
Integrating women into the Board of
Directors (BOD) may encounter practical obstacles, such as adjusting to a
corporate culture that is predominantly male, potentially impeding their
ability to effectively implement Environmental, Social, and Governance (ESG)
programs. If the Board of Directors simply selects women to fulfill quotas or
statutory obligations, without showing a sincere dedication to their
empowerment, it may potentially reduce the expected beneficial impact on
Environmental, Social, and Governance (ESG) matters.
Comprehensive Training and Development
for Female Board of Directors Members, conduct targeted training and
development programs for female members of the Board of Directors to improve
their proficiency in directing Environmental, Social, and Governance (ESG)
initiatives and exerting influence on corporate policies.
Increase Support and Collaboration
within the BOD, ensure that female members of the Board of Directors receive
comprehensive support from the whole board and operate within a cooperative
work environment. Overcoming Cultural and Social Bias, address cultural and
social biases that could hinder the successful performance of female members of
the Board of Directors in executing ESG initiatives. Optimizing Resource Allocation,
assign suitable resources to facilitate Environmental, Social, and Governance
(ESG) initiatives led by female members of the Board of Directors (BOD).
Improving Transparency and
Accountability, enhance the level of openness and responsibility in the process
of making decisions related to environmental, social, and governance (ESG)
matters, in order to guarantee the successful execution of initiatives led by
women on the Board of Directors (BOD).
The
Establishment of Sustainability Committee Has Lowered the ESG Score
Agency Theory posits that a conflict of interest may arise between the
management, acting as the agent, and the shareholders, acting as the principal.
Given the circumstances, the presence of a sustainability committee could fail
to produce the expected benefits if there are specific difficulties in
executing and supervising its activities. Companies may establish
sustainability committees without a genuine commitment to implementing
successful ESG activities, using them simply to showcase compliance or fulfill
external requirements.
Stakeholder Theory posits that
companies should take into account the concerns and interests of different
stakeholders when making decisions. The Sustainability Committee may lack the
necessary authority or influence inside the firm to make significant decisions
or effectively execute Environmental, Social, and Governance (ESG) principles.
Committee members may encounter opposing perspectives, both internally and
externally, that might hinder the successful implementation of ESG initiatives.
Resource-Based Theory posits that a
company's competitive advantage is derived from its resources and capabilities.
Inadequate resources allocated to the Sustainability Committee may result in
weak and ineffective Environmental, Social, and
Governance (ESG) initiatives. The lack of experience in ESG among committee
members may hinder their ability to make meaningful contributions.
A corporate culture that lacks support
for change or innovation in environmental, social, and governance (ESG)
concerns may impede the committee's efforts to execute ESG initiatives. If
there is not a sincere dedication to sustainability, the presence of the
committee could undermine the legitimacy and efficacy of ESG initiatives.
The Sustainability Committee may
encounter bureaucratic impediments within the firm, thereby impeding the
execution of ESG policies and activities. The company's overarching strategy
may not be in accordance with the committee's objectives and priorities,
resulting in insufficient commitment to ESG activities.
Sustainability committees can enhance
their influence on strategic decision-making by establishing a distinct and
powerful mandate. This ensures the incorporation of ESG policies and activities
into all aspects of the company's operations. A greater degree of authority
also empowers the committee to enact substantial transformations in company
operations that prioritize environmental and social sustainability.
In order to properly fulfill their
responsibilities, sustainability committees must have adequate resources, such
as financial support, time allocation, and access to pertinent data. By
appropriately allocating resources, the committee may successfully adopt more
efficient ESG programs and policies. Adequate resources also enable the
committee to carry out the research and development required for sustainable
innovation.
Members of the sustainability
committee should possess competence and a comprehensive understanding of
environmental, social, and governance (ESG) issues. By means of training and
capacity-building, committee members can acquire knowledge and skills regarding
the most recent trends and optimal methods in sustainability. The committee's
strong experience empowers them to make well-informed and strategic decisions
to advance the company's ESG goals.
Establishing a corporate culture that
upholds Environmental, Social, and Governance (ESG) ideals is crucial for the
effectiveness of sustainability initiatives. Companies can foster employee
engagement by fostering a culture of sustainability throughout the
organization, hence driving active involvement from employees. Developing an
ESG-friendly culture is crucial for integrating sustainable measures into the
company's daily operations.
ESG policies and programs can experience delays due to bureaucratic
obstacles. Through the optimization of procedures and the elimination of
administrative obstacles, companies can enhance the effectiveness of their
sustainability initiatives. Streamlining administrative processes also enables
sustainability committees to promptly address emerging developments and
obstacles encountered in pursuit of ESG objectives.
A
Higher Number of Foreign BOD Have Lowered the ESG Score
Agency Theory posits that a conflict of interest may arise between the
management, acting as the agent, and the shareholders, acting as the principal.
Foreign directors may prioritize the concerns of global shareholders or parent
firms over local ones, leading to decisions that are less aligned with local
environmental, social, and governance (ESG) goals. Foreign directors may
prioritize short-term goals related to financial or operational targets, thus
impeding the implementation of long-term ESG measures that necessitate
substantial investment.
The Stakeholder Theory posits that
companies should take into account the concerns and interests of different
stakeholders when making decisions. Foreign directors may exhibit a lack of
involvement with local stakeholders, potentially leading to the formulation of
policies and choices that do not align with their requirements and
expectations. Inadequate engagement with local stakeholders might diminish the
effectiveness of communication and collaboration in executing ESG efforts.
The effectiveness of foreign directors
in implementing ESG policies may be influenced by cultural and regulatory
differences between their country and the local context. Foreign directors may
have limited comprehension of the indigenous culture, societal conventions, and
environmental protocols unique to Indonesia, therefore their choices may not
align well with local requisites and anticipations. Foreign directors may
possess distinct ESG (Environmental, Social, and Governance) goals influenced
by their background in their respective countries of origin, which may not
align with the specific requirements and difficulties of the local context.
The effectiveness of ESG policy
implementation can be hindered by communication and coordination challenges
between foreign directors and local directors. Language barriers can
impede efficient communication between international directors and local
directors, resulting in miscommunication and a lack of collaboration.
Contextual factors in corporate
administration and functioning. Foreign directors may have a significant rate
of personnel changes, thus impeding the consistency and stability in the
execution of ESG policies. Foreign directors may be experienced with a regulatory
environment that is distinct from the local one, which could result in their
lack of knowledge or failure to comply with local ESG laws.
Foreign directors must possess a comprehensive understanding of the local
context in Indonesia, encompassing the cultural nuances, regulatory framework,
and unique obstacles encountered by companies. By acquiring a deeper
comprehension, foreign directors can enhance their ability to make
decisions that are both pertinent and impactful within the local context.
Enhancing communication and
coordination between foreign directors and local directors helps minimize
misunderstandings and enhance synergies. This ensures that the company's
Environmental, Social, and Governance (ESG) objectives are comprehended and
backed by all levels inside the organization.
To improve sustainability performance,
it is necessary to synchronize the goals of the foreign director with the
company's environmental, social, and governance (ESG) objectives. Alignment can
be accomplished by articulating shared objectives and establishing transparent
performance metrics.
Involving local stakeholders, like
employees, communities, and regulators, can assist foreign directors in
comprehending and addressing their requirements and anticipations. This
participation can additionally cultivate support and enhance the credibility of
the company's ESG initiatives.
It is crucial to achieve excellent
environmental, social, and governance (ESG) performance by making sure that
foreign directors have a clear understanding of and adhere to all the local
laws and regulations. Thorough compliance to regulations can help prevent legal
problems and enhance the company's reputation among local stakeholders.
Implementation
Plan & Justification
A
Higher Number of BOD Have Lowered the ESG Score
In relation to the
solutions examined, the company can adopt the following implementation plan
1.
Strengthening
Board Oversight Structures and Processes
·
Revise
the Board Charter: Revise and clarify the Board Charter to explicitly outline the duties and
obligations of each Board member, with specific emphasis on Environmental,
Social, and Governance (ESG) activities.
·
Enhanced
Supervisory Capability: Create a specialized committee within the board with the responsibility
of supervising the execution of the ESG policy. The composition of this
committee should comprise board members who possess both expertise and a strong
dedication to ESG (Environmental, Social, and Governance) matters.
·
Performance
Measurement and Evaluation: Develop and implement a framework for evaluating the performance of board
members and senior management that incorporates ESG metrics.
2.
Enhanced ESG Proficiency Among Board Members
· Training and
Development: Conduct training programs and workshops for board members on
Environmental, Social, and Governance (ESG) subjects, comprising up-to-date
trends, rules, and optimal practices.
· Hiring of ESG
Experts: To enhance the board's viewpoint, it is advisable to recruit fresh
board members or advisers that possess extensive knowledge and competence in
environmental, social, and governance (ESG) matters.
· Collaboration with External
Experts: Collaborate with ESG consultants or experts to provide strategic and
operational direction for the creation and execution of ESG policies.
3.
Strong
Commitment to ESG Goals Across the Organization
·
Integration
of ESG into Corporate Strategy: Incorporate ESG objectives and metrics into the
company's strategic plan and ensure their integration into the company's vision
and mission.
·
Communication
and Transparency: Enhance both internal and external communication regarding
the company's Environmental, Social, and Governance (ESG) commitments and
performance. Release comprehensive and precise sustainability reports that are
easily accessible and provide clear information.
·
Participatory
Initiatives: Empower all employees in ESG initiatives through inclusive
programs like environmental awareness campaigns, volunteer activities, and
incentives for employees who contribute to ESG initiatives.
4.
Optimization of the Decision-Making Process
· Enhancing the
Process of Meetings: Revise the structure and frequency of board meetings to
enhance their focus and efficiency, incorporating well-defined agendas and
organized priorities.
· Use of Technology:
Utilize technology and digital collaboration tools to enhance the effectiveness
of communication and documentation in the process of decision-making.
· Task Delegation:
Delegate operational duties to specialized committees or persons in order to
allow the Board to dedicate greater attention to strategic decision-making.
5.
Effective Allocation of Resources
·
ESG
Budget: Create a specific financial plan for ESG initiatives and ensure that
the amount of money allocated is sufficient to support a range of ESG programs
and projects.
·
Human
Resources: Hire and educate committed personnel to oversee and implement ESG
efforts, such as the position of ESG Manager or Sustainability Officer.
·
Impact
Measurement: Develop and deploy an impact measurement system capable of
consistently monitoring and reporting the outcomes of environmental, social,
and governance (ESG) projects.
A
Higher Number of Woman Ratio on BOD Have Lowered the ESG Score
In relation to the
solutions examined, the company can adopt the following implementation plan:
1.
Comprehensive
Training and Development for Female Board of Directors Members
·
The
Continuous Learning Program: Conduct regular training programs specifically
designed for female members of the Board of Directors, with a focus on ESG
(Environmental, Social, and Governance), leadership, and strategic
decision-making subjects.
·
Mentorship
Programs: Establish mentorship programs that facilitate connections between
female members of the Board of Directors and experienced business leaders who
possess extensive knowledge and proficiency in Environmental, Social, and
Governance (ESG) matters.
·
Workshops
and Seminars: Arrange frequent workshops and seminars focused on the most
recent trends, optimal methods, and tactics for implementing ESG.
2.
Increase
Support and Collaboration within the BOD
·
Team-Building
Activities: Facilitate collaborative activities to enhance interpersonal
connections and foster cooperation among board members, regardless of gender
(both men and women).
·
Inclusivity
Training: Offer comprehensive training on inclusion and diversity to every
member of the Board of Directors (BOD) with the aim of fostering an atmosphere
that actively promotes and appreciates the valuable contributions made by
women.
·
Periodic
Evaluation Meetings: Conduct regular feedback sessions where members of the
Board of Directors can express their opinions and provide suggestions for
enhancing support for Environmental, Social, and Governance (ESG) projects.
3.
Overcoming
Cultural and Social Bias
·
Awareness
Campaigns: Implement internal awareness initiatives to educate employees and
management on the significance of gender diversity and its influence on
corporate performance.
·
Bias
Training: Provide comprehensive unconscious bias training to all members of the
Board of Directors and senior management in order to mitigate the impact of
cultural bias.
·
Policy
Revisions: Revise company rules to ensure they are aligned with gender equality
principles and effectively address any prevailing biases.
4.
Optimizing
Resource Allocation
·
Dedicated
ESG Budget: Create a specific budget for environmental, social, and governance
(ESG) initiatives and ensure that this budget includes financial support for
programs managed by women on the Board of Directors (BOD).
·
Resource
Allocation: Ensure sufficient allocation of both people and material resources
to facilitate the implementation of women-led environmental, social, and
governance (ESG) policies on the Board of Directors (BOD).
·
Performance
Metrics: Develop and apply precise performance criteria to evaluate the
influence of environmental, social, and governance (ESG) initiatives led by
female members of the Board of Directors (BOD).
5.
Improving
Transparency and Accountability
·
Regular
Reporting: Implement a consistent reporting timetable to provide updates and
outcomes of ESG initiatives, including dedicated reports highlighting the
contributions made by female members of the Board of Directors.
·
Accountability
Mechanisms: Introduce accountability measures, such as setting performance
targets for individuals and teams, to guarantee that every member of the Board
of Directors is held responsible for their contribution to environmental,
social, and governance (ESG) matters.
·
Stakeholder
Engagement: Involve external stakeholders in the evaluation and
assessing of ESG initiatives to enhance transparency and foster
confidence.
The
Establishment of Sustainability Committee Has Lowered the ESG Score
In
relation to the solutions examined, the company can adopt the following
implementation plan:
1.
Enhance
the Authority and Impact of the Sustainability Committee
·
Revise
Committee Charter: Revise committee charters to establish precise and clear
directives, along with substantial duties in ESG decision-making.
·
Direct
Reporting Lines: To enhance influence and accountability, it is important that
the committee reports directly to the board.
2.
Provide
Adequate Resources
·
Allocated
funds: Create a specific budget to provide financial support for committee
activities and initiatives.
·
Resource
Accessibility: Ensure that the committee is provided with essential resources,
such as data, technology, and human assistance.
3.
Enhance
Committee Expertise and Capacity
·
Expert
Recruitment: Enhance the committee's competence and knowledge by recruiting
members who possess expertise in ESG.
·
Training
and Development: Provide continuous training sessions for committee members
regarding the most up-to-date ESG concerns and best approaches.
4.
Establishing
a Culture That Supports ESG
·
Awareness
Campaign: Implement an internal awareness campaign to promote the significance
of ESG efforts and the committee's involvement in accomplishing those
objectives.
·
Integration
and Engagement: Engage all staff in ESG initiatives to foster a business
culture that promotes sustainability.
5.
Streamlining
Bureaucratic Obstacles
·
Optimize
Workflows: Streamline administrative procedures to accelerate the execution of
ESG policies and initiatives.
·
Effective
Communication Channels: Facilitate the establishment of transparent and
efficient communication channels between the committee and other departments
within the company in order to enhance coordination and collaboration.
A
Higher Number of Foreign BOD Have Lowered the ESG Score
1.
Increase
Local Understanding and Engagement
·
Local
Induction Programs: Organize a local orientation program for foreign directors
that encompasses instruction on indigenous culture, societal norms, and
environmental regulations.
·
Community
Engagement: Promote the active involvement of foreign directors in community
activities and dialogue forums with local stakeholders.
2.
Enhancing
the effectiveness of Communication and Coordination
·
Language
Training: Offer language courses to both foreign and local directors to
mitigate language obstacles and enhance communication with local teams.
·
Coordination
Tools: Utilize digital collaboration platforms to facilitate efficient
coordination between foreign directors and local directors.
3.
Ensuring
Goal Alignment
·
Alignment
Workshops: Conduct workshops to synchronize ESG objectives and priorities among
foreign directors and local directors, guaranteeing mutual comprehension and
support of shared goals.
·
Performance
Metrics: Incorporate environmental, social, and governance (ESG) performance
indicators into the performance assessments of foreign directors to ensure
their attention is directed towards long-term objectives.
4.
Improving
Stakeholder Engagement
·
Stakeholder
Mapping: Perform stakeholder mapping to identify the specific requirements and
anticipations of the local community, and utilize this data in the process of
making informed decisions.
·
Regular
Engagement: Conduct frequent meetings with local stakeholders to establish
solid connections and ensure that ESG policies align with their requirements.
5.
Enhance
Adherence to Local Regulations
·
Regulatory
Compliance Training: Deliver localized regulatory training for foreign
directors to ensure their comprehension and adherence to local environmental,
social, and governance (ESG) standards.
·
Compliance
Audits: Perform routine regulatory compliance audits to verify that firm
policies and practices adhere to local regulations.
Conclusion
Incorporating effective ESG practices in companies can result in
significant enhancements in their overall performance and sustainability. ESG
practices embrace not only environmental and social responsibilities but also reinforce
corporate governance, making firms more appealing to investors, customers, and
other stakeholders. This study provides valuable insights into the impact of
board composition, the existence of sustainability committees, and the
influence of several control variables on ESG scores in Indonesian public
companies. The
robustness test shows that the regression model used is valid and reliable. The analysis
reveals that certain aspects of board composition have a beneficial impact on
ESG performance, while others may unintentionally hinder it. This highlights
the complex connection between board composition and sustainability
performance.
Overall, the composition and qualities
of a company's board have a significant impact on its ESG performance. Although
the concept of having varied and specialized committees is theoretically
advantageous, it is crucial to have effective practical execution and
supportive mechanisms in place to fully realize their potential benefits.
Successful ESG performance requires both a complex organizational structure and
a sincere dedication to and seamless integration of ESG principles within the
board's activities.
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