**1. Introduction**

Corporate governance has become a topic of global discussion since The New York Stock Exchange Crash on 19 October 1987, when many multinational companies listed on the New York Stock Exchange experienced huge financial losses. Implementing Corporate Governance (CG) is considered an anticipation for company executives to hide losses with financial engineering aimed at revamping performance and financial reports (Pramono 2011). One of these preventive measures is contained in the CG guidelines, which require an independent commissioner to form an audit committee tasked with overseeing financial management and observing the reporting process to encourage reliable financial reports so that it can increase investor trust.

CG issues in the first generation were dominated by conflicts of interest between principals and agents because of the separation between ownership and control of a modern company. Conflicts of interest between principals and agents arise when a company grows larger so that the company's management that was originally held by the owner (ownermanager) must be handed over to professionals. In this case, the issue that is considered dominant is the need for a mechanism to ensure that the management (agent), who is

**Citation:** Hartono, Suldja, Mochammad Al Musadieq, Kusdi Rahardjo, and Tri Wulida Afrianty. 2023. The Critical Factors Affecting the Implementation of Corporate Governance in Indonesia: A Structural Equation Modeling Analysis. *Economies* 11: 139. https://doi.org/10.3390/ economies11050139

Academic Editors: María del Carmen Valls Martínez, José-María Montero and Pedro Antonio Martín Cervantes

Received: 9 January 2023 Revised: 10 March 2023 Accepted: 20 March 2023 Published: 8 May 2023

**Copyright:** © 2023 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https:// creativecommons.org/licenses/by/ 4.0/).

a worker in a company that owns capital (principal), will manage the company in the interests of the owner (Berle and Means 1932).

In the second generation, CG issues lead to conflicts of interest between strong majority and weak minority shareholders (La Porta et al. 1998). According to La Porta et al. (1998), the application of CG in a country is influenced by the condition of legal instruments in protecting the interests of various parties related to the company, especially minority owners. A legal system that is not conducive and is not yet in favor of the public interest can result in a strong conflict between strong majority shareholders and weak minority shareholders, so it has the potential to damage the country's economic system as a whole.

In Indonesia, CG has begun to be widely applied to companies since the 1997 monetary crisis. The application of CG has become a vital need for state-owned companies (BUMN) and private companies (individuals) as a fundamental value for increasing the welfare and sustainability of companies (Dwiridotjahjono 2009). However, CG principles still needed to be fully implemented during the early 21st decade, and CG has yet to show significant progress in Indonesia. It is illustrated by the annual Credit Lyonnais Securities Asia (CLSA) (2018) survey regarding the evaluation of CG implementation in Asia Pacific countries. Indonesia still ranks 12th, which only fulfils 34% of the 100 assessment indicators. Fundamental problems causing hampered implementation of CG include, among others (Pramono 2011), the practice of companies financed by banks belonging to business groups, as well as short-term loans from abroad, shareholder domination, the ineffective performance of regulators and financial institutions, and weak protection of creditors and investors.

One of the efforts to improve CG implementation in Indonesia is appreciating BUMN and BUMS companies. Nevertheless, these efforts still have not increased the professionalism of the company. Winner companies are still involved in disciplinary cases, such as PT PLN (BUMN) in the Riau-1 PLTU bribery case and PT Garuda Indonesia in the aircraft procurement bribery case. It has become a concern of researchers to identify why the implementation of CG in Indonesia has not been successful even though the regulations, instruments, and tools are good. Indreswari (2006) and Allen and Gale (2000) stated that the low performance and efficiency of BUMN occurred due to the monopoly of certain sectors, which encouraged abuse of authority. Morgan (2006) mentioned that competition could replace external CG management to improve the company's quality so that the organization will be closely related to the environment. As a stimulus factor, the environment has elements that will affect the organization (Lubis and Huseini 1987).

Isukul and Chizea (2015), in research conducted in Nigeria, South Africa, and Egypt, stated that a good and conducive environment would support the development of CG in each country, and regulations have a major impact on CG (La Porta et al. 1998). Stimulus in regulation will demand compliance, while stimulus in competition focuses on increasing organizational value on marketability and improving the quality of human resources (Udayasankar et al. 2008). CG implementation as a response is expected to increase the professionalism of managers. Sharma and Joseph (2003) explained that the implementation of CG will only be successful with the support of professionalism from parties related to the company. The value of professionalism has several attributes, namely self-confidence, service, confidentiality, competence, contract, community, caring, and commitment (Spitzech and Hansen 2010). Hall (1968) found that professionalism was not correlated with authority and the existence of regulations and procedural specifications. However, professionalism is positively correlated with a division of labor, impersonality, and compensation. Dawuda (2010) also explains that CG can be used as an antidote to corruption and a proven control in several countries to ensure good governance is running. Dawuda's research found that CG can form competent and professional personnel if the governance structure has been properly implemented and implemented.

Furthermore, Wahyudin and Solikhah (2017) found that understanding the importance of good corporate governance (GCG) has already grown in Indonesian businesses. The listed businesses that took part in CGPI Awards from 2008 to 2012 always see an

improvement in both number and quality. Accounting-based financial performance, such as return on assets, return on equity, and earnings per share, are impacted by the CG rating of Indonesian go-public businesses. The Indonesian stock market does not immediately respond to CG implementation rating, so it has yet to be able to accelerate the company's growth soon. In this study, to find out how the environment in the form of regulation, competition, and societal culture influences organizations in implementing CG, the stimulus-organism-response (SOR) model is used Mehrabian and Russell (1974). The SOR paradigm is applied to three levels of interrelated variables. This model implies that human behavior can be better understood as an interactive process in which environmental events (stimuli) are perceived and processed cognitively by individuals in organizations that lead to a type of behavior (response). D. J. Campbell (1985) confirms that the SOR model can be used to explain individual behavior towards their work in organizations. Figure 1 gives a framework chart for using the SOR model (Mehrabian and Russell 1974) in this research.

**Figure 1.** SOR Model Thinking Framework in Research.

The SOR model framework is a novelty in this study. The environment is a variable that influences the organization in realizing good CG implementation. Environmental influence analysis uses appropriate institutional theory in explaining, understanding, and measuring organizational behavior. DiMaggio and Powell (1983) argued that organizations will operate in similar environments and adopt the same structure and culture. In previous research, Udayasankar et al. (2008), Su (2006), and Gallego-Alvarez and Pucheta-Martinez (2019). The institutional theory used to analyze environmental and organizational influences is not applied to the SOR model framework, which is considered to be used to measure behavior in this study as the perception of managers in implementing CG. Udayasankar et al. (2008) measured regulatory environment variables and competition in the organization. Su (2006) measured culture, and Gallego-Alvarez and Pucheta-Martinez (2019) measured regulatory (coercive), competitive (mimetic), and cultural (normative) environments based on institutional theory to measure their effect on firms in disseminating information.

The implementation of CG in Indonesia has yet to increase the professionalism of managers, even though there are sufficient institutional regulatory instruments from the government. Using the theory of individual behavior, the various problems of abuse, and problems that exist, it can be shown that the perception of CG has not been able to form an attitude that builds professional behavior. The SOR behavior change model and institutional theory are expected to explain the influence of regulation, competition, and culture on organizational culture and structure, which will affect the implementation of CG. This combination of different models and theories will capture the interactive influence of the regulatory environment, competition, and culture on organizational culture and structure so that CG implementation can shape manager professionalism.

This research was conducted in the Kaltim Industrial Estate (KIE) area considering the material's mastery level and the relatively controlled environment. The KIE area also has companies whose shareholders are controlled by the government (BUMN) and the private sector, both individuals and foreign investment (PMA), so this research can examine more deeply about the research subject. The motivation to conduct this research is to answer why CG has not developed properly in Indonesia (ACGA 2014; Indreswari 2006). This study compares the influence of employees' perceptions of state-owned and private companies on implementing CG quantitatively using an institutional isomorphism approach. The research conducted expected to provide an empirical contribution to the application of the stimulus-organism-response model in obtaining a solution to the problem of why the application of CG in companies still cannot increase professionalism; provide an empirical contribution in testing that CG will develop and be closely related to the environment in which the company is located; provide an empirical contribution in testing that government with its regulations, industry with competition, and culture with corporate ethics and norms are three environmental dimensions that greatly influence the implementation of CG; and provide an empirical contribution to the implementation of CG principles as a measurement indicator of CG implementation. This research also provides empirical contributions in the application of institutional theory models because institutional theory can be considered capable of explaining, understanding, and measuring organizational behavior, and contributing empirically to testing the theory used to explain the process of adaptation in institutional practice within organizations called an isomorphism. This research enhances the SOR model framework as a novelty and implements it on companies whose shareholders are controlled by the government.

The research consists of introduction of the research, theoretical concepts, research hypothesis, the methodology used for this research, the measurement of variables and the results of the research, the discussion of the results, and concludes by providing research limitations, managerial implications, and discussion material for further research.

#### **2. Theoretical Concepts and Hypothesis Development**

Since it became a global discussion in 1987, corporate governance has been used to anticipate company executives so as not to hide the company's losses. The Asian crisis is suspected because of weak CG implementation (Johnson et al. 2000). Research organized by ADB (2000) stated that the weakness of CG in Asia arose due to a high level of ownership structure, government intervention, underdeveloped capital markets, and weak law enforcement. Furthermore, research on CG has been carried out by Paniagua et al. (2021), who examines how CG and ownership structures relate to the financial performance of firms. Several factors, including organizational culture, organizational structure, regulatory environment, competitive environment, and national cultural environment, influence the implementation of CG in a company.

Organizational culture is defined as organizational practices that express the values of that organization. Deal and Kennedy (1982) and Peters and Waterman (1982) are some of the works that popularized organizational culture. The popularity of the organizational culture literature during the 1980s appears to have responded to the decline in corporate performance in the United States vis-a-vis firms in Japan. Academics seek to explain this decline by relying on culture as the main factor. In another study (Hofstede 2001), the focus on culture shifts to the power one has over CG where culture becomes a strong explanatory variable.

Contrary to previous arguments regarding a direct relationship between organizational culture and performance, this study's conceptual framework hypothesizes that organizational culture is not directly related to performance. However, the relationship occurs through internal CG. Semenov (2000) argues that " ... simple models linking culture to performance no longer match the knowledge that academics have developed regarding culture's role in organizational analysis. There is a need for a better understanding of the relationship between culture and impact on organizations".
