Executive Compensation, Sustainability, Climate, Environmental Concerns, and Company Financial Performance: Evidence from Indonesian Commercial Banks

Eriana Kartadjumena,Waymond Rodgers

doi:10.3390/su11061673

Eriana Kartadjumena, Waymond Rodgers

Open Access

https://doi.org/10.3390/su11061673

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Abstract

This research investigates whether executive compensation is designed to motivate managers to pursue corporate sustainability (CS) concerns as measured by Global Reporting Initiative (GRI) 3.1 disclosure indicators in Indonesian listed commercial banks throughout 2007–2014. In addition, this study examines the impact of executive compensation, climate, and environmental concerns on both financial health and market value performance as components of company financial performance (CFP). This study, based on an agency theoretic and stakeholder positions, focuses on banking entities in a developing country, and enriches the literature by examining topics through the application of the Throughput Model that captures different pathways and stages. The results suggest that higher executive compensation in Indonesian banking entities may motivate management to do more for climate and environmental concerns, as well as to enhance CFP. Contrary to expectations, climate and environmental concerns have a significant negative impact on both financial health and market value performance. This implies that Indonesian banking companies may tend to conduct corporate responsibility activities only for their own-sake as an altruism motive, which influences the reduction of firms’ financial performance. This study comes to the conclusion that CS concern depicts a weakening factor as well as a partial mediator in the relationship between executive compensation and financial health performance.

Highlights

Over the last two decades, the research examining executive compensation, climate, and environmental concerns, and company financial performance (CFP) displayed a rich and growing literature within the management literature [1,2,3,4,5].as the recent worldwide corporate scandals led to firms’ collapse and financial difficulties, the on-going debates in popular media have shifted their main question to whether the high level of executive remuneration is worth paying in order to increase firms’ performance and avoid a corporations’ financial decline
The sustainability concerns consist of three main areas of performance, namely the following: (1) Economic performance (EC), which consists of nine indicators; (2) Environment performance (EN), which consists of 16 indicators; (3) Social performance (SOC), which consists of four parts of valuation performance: (a) Human rights performance (HR), which consists of six indicators; (b) Labour practices and decent work performance (LA), which consists of 11 indicators; (c) Product responsibility performance (PR), which consists of five indicators; and (d) Society performance (SO), which consists of seven indicators
In Model 2, by allowing executive compensation and corporate sustainability concern independently and while interacting with each other to influence company financial performance, this study identified that CS concerns can serve as both a negative moderator and partial mediator construct for the positive relationship between executive compensation and company financial health

Summary

Introduction

Over the last two decades, the research examining executive compensation, climate, and environmental concerns (hereinafter called corporate sustainability or CS), and company financial performance (CFP) displayed a rich and growing literature within the management literature [1,2,3,4,5].as the recent worldwide corporate scandals led to firms’ collapse and financial difficulties, the on-going debates in popular media have shifted their main question to whether the high level of executive remuneration is worth paying in order to increase firms’ performance and avoid a corporations’ financial decline. By using new unbalanced panel data of 252 firm-year observations (39 firms) during the period of 2007–2014, this study tests the relationship among constructs using four different research models based on shareholder and stakeholder perspectives. Both perspectives are examined by employing the throughput model, a decision-making model by the authors of Rodgers [11], Foss and Rodgers [12], consisting of four major concepts, suggesting that decision-makers consider perception (P) and information (I) to determine a judgment (J) in making a decision choice (D)

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