Board of Directors Effectiveness, Integrated Reporting Quality, and
Firm Risk
Rita Sugiarti, Ancella Anitawati Hermawan
Faculty of Economics, Universitas Indonesia, Kampus FEB UI Depok, 16424, Indonesia
Keywords: Board of Directors Effectiveness, Integrated Reporting Quality, Firm Risk
Abstract: IR is propose to "reform" corporate's financial statements, address the shortcomings in existing reporting
practices and provides a better understanding of financial and non-financial information in an integrated
manner. This study aims to provide empirical evidence on the role of IR quality in mediating the effect of
board of director effectiveness on firm risk directly and indirectly. This study is a quantitative research and
used panel data. The sampleswere used are 143 listed companies on the Johannesburg Stock Exchange
(South Africa) with 4 years observation that is from 2014 to 2017. Structural Equation Model was used to
analize data and test hypotheses. The results found that BOD effectiveness has a significant negative effect
on firm risk but has not affect IR quality,andIR quality has not affects firm risk directly. This study also
found that IR quality cannot mediate the effect of BOD effectiveness on firm risk. It is because the
implementation of IR was only use to comply with regulatory requirements.
1 INTRODUCTION
Current corporate reporting model deemed to be
less relevant to shareholders (Financial Reporting
Council, 2011), failed to provide tools that can be
used to communicate future opportunities, strategy
and value creation (Simnett& Huggins, 2015) and
cannot meet stakeholders' information needs to
assess past and future corporate performance
(Flower, 2015). To respond this issue, Integrated
Reporting (IR) has proposed to "reform" the
company's reporting model. IR provides a better
understanding to stakeholders about financial and
non-financial information in an integrated manner
(IIRC, 2013).
In practice, in most countries of the world, IR is
voluntary and the first country to require IR is South
Africa. Although in South Africa IR is mandatory,
but compliance level of each firms may differ
because basically IR guidance regulates minimum
level of firms to disclose IR components so that the
firms may publish IR more than minimum level. On
contrary, the regulation also provides management
flexibility in publishing IRs for being "applied" or
"explain". The companies may present IRs below
minimum level and only provide explanations for
reasons of non-compliance. Therefore, this may
cause IR quality level to be different for each
company. For this reason, this study used listed
companies on the Johannesburg Stock Exchange as
samples.
Corporate governance is one factor that can
affect IR quality (Velte&Stawinoga, 2016;
DeVilliers et al., 2017). To improve IR quality,
boards play a role in monitoring performance of
management and ensuring accountability of
management in manage the company (including
financial reporting process).
DeVilliers et al. (2017) suggested totests IR
consequences such as firm risk. IRs issued by the
company should contain information that integrates
Environment, Social, and Governance (ESG) factors
into strategy, output measurement and risk and
opportunities assessment faced by company to
maximize long-term value creation (Steyn, 2014).
Corporate social performance is often defined as the
ESG factor (Sassen, Hinze, &Hardeck, 2016).
Higher social performance can increase company
value through improved financial performance i.e.
cash flow and / or capital cost reduction (Plumlee,
Brown, Hayes, & Marshall, 2015). The low social
performance allows high lawsuits to be faced by
company. Conversely, high corporate social
performance can reduce firm risk because it can
meet information needs of various stakeholders, and
also can create a moral capital that can make
112
Sugiarti, R. and Anitawati Hermawan, A.
Board of Directors Effectiveness, Integrated Reporting Quality, and Firm Risk.
DOI: 10.5220/0008437401120121
In Proceedings of the 4th Sriwijaya Economics, Accounting, and Business Conference (SEABC 2018), pages 112-121
ISBN: 978-989-758-387-2
Copyright
c
 2019 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved

stakeholders become more loyal to company, so that
stakeholders tend to react less to negative news
about company and can reduce firm risk and
resulting in increasing volatility and market risk
(Sassen et al., 2016). Some researchers have
examined the association of ESG factors to firm risk
(Oikonomou, Brooks, &Pavelin, 2012; Sassen et al.,
2016). However, until now researchers have not
found a study that examines the effect of IR quality
on firm risk.
The existence of corporate governance structures
(such as Board of Directors effectiveness) is
expected to reduce firm risk as it may impede
managerial opportunistic behavior and excessive risk
taking (Balachandran& Faff, 2015). Mathew et al.
(2018) documented that corporate governance index
(compiled based on board attributes such as
composition, leadership structure, member
characteristics, and board processes) are negatively
related to firm risk because they can influence
control role, so board attributes may affect firm risk
through its impact on strategic direction for
management and control functions.
Research that examines relationship of
governance and firm risk is still limited (such as
Alam& Shah, 2013; Sila et al., 2016; Mathew et al.,
2018). The researchers measured corporate
governance based on each board's characteristics.
Alam& Shah (2013) examines ownership,
independence, size, and CEO-Duality against firm
risk, while Sila et al. (2016) examines the effect of
proportion of women on board against firm risk.
This study examines the effects of corporate
governance (as measured by overall BOD
characteristics or BOD effectiveness) on firm risk.
This study aims to provide empirical evidence on the
effect of BOD effectiveness on firm risk, and the
role of IR quality in mediating those influences.
Based on signaling and legitimacy theory, this
study developed hypotheses. This study used panel
data from 143 listed companies in JSE from 2014 to
2017. Using Structural Equation Modeling (SEM)
analysis, this study found that BOD effectiveness
has a negative effect on firm risk. However, BOD
effectiveness does not affect IR quality in which IR
quality does not affect firm risk. This study also
found that IR quality cannot mediate the effect of
BOD effectiveness against firm risk.
2 LITERATURE REVIEW AND
HYPOTHESIS DEVELOPMENT
2.1 Integrated Reporting Quality
IR is a brief communication of how corporate
strategy, governance, performance and prospects can
lead to create short, medium and long term value
(IIRC, 2013). IRs including eight interrelated
content elements: organizational overview and
external environment, governance, business models,
risks and opportunities, strategy and resource
allocation, performance, outlook, and base of
presentation.
2.2 Firm Risk
Ross et al. (2015) classifies firm risk into two
components: systematic and specific or unsystematic
risk. Systematic risk is all risks that can affect a
large number of assets become larger or smaller.
This risk is often referred to as market risk as there
is uncertainty about economic conditions such as
GNP, interest rates, or inflation. While specific or
unsystematic risk is defined as a risk that
specifically affects an asset or a small asset such as
announcement of an oil strike by a company will
only affect the company itself or some other
company, it will not affect the world oil market.
Such information is unsystematic and affects only
certain companies. This risk is also often referred to
as an idiosyncratic risk (Ross et al., 2015).
2.3 Board of Directors Effectiveness
BOD effectiveness is influenced by the
characteristics it possesses. Hermawan (2011) uses
several board characteristics (i.e. independence,
activity, size, and board competencies) to measure
board of commissioner effectiveness, but his
research uses a sample of Indonesian companies
which follow a two-tier system. This study uses a
sample of listed companies on Johannesburg Stock
Exchange (South Africa) which adopt a one-tier
system where there is no board of commissioners, so
board characteristics are used to measure BOD
effectiveness. First characteristic is independence.
King III (2009) requires that majority of non-
executive directors be independent to reduce
conflicts of interest and encourage objectivity.
Second characteristic is board activity.
Frequent meetings will have a more effective
role as they can better control the company (Lipton
Board of Directors Effectiveness, Integrated Reporting Quality, and Firm Risk
113

&Lorsch, 1992). Third characteristic is board size.
King III (2009) requires that board must have at
least two executive directors who must become
CEOs and other directors responsible for finance.
Last characteristic is competence. The effectiveness
of boards monitoring role depends on their
experience, knowledge, and educational background
so they can have ability to understand business
operations of the company and also they must have
competence in understanding company's financial
statements, since reported financial performance is
one of the information used in evaluating action
management (Hermawan, 2011).
2.4 Board of Directors Effectiveness
and Firm Risk
Board plays a role in lead company with a
prudent and effective controlling framework for
assessing and managing risks (Mallin, 2016). Board
attributes (measured by composition, leadership
structure, characteristics, and board processes)
determine how board performs control roles,
services, and strategies that can affect results and
performance of the company and it is expected that
these board attributes relate to firm risk through its
impact on strategic direction over function and
management control (Mathew et al., 2018). Bennett
(2013) confirmed that enhanced monitoring roles,
through increased board attendance and other factors
related to less risk taking. Platt & Platt (2012) tested
several board attributes linked to bankruptcy and
found that bankrupt companies have fewer
independent directors, smaller board sizes, higher
shareholdings by directors, less compensation and
nominations. This indicates that the board factors are
related to firm risk.
Baulkaran (2014) found that board size can
reduce firm risk, this is because more board
members the company's monitoring role is
increasing which will reduce firm risk. Mathew et al.
(2018) is also documented that governance as
measured by board attributes is negatively related to
firm risk. Based on the description above, the first
hypothesis in this study is as follows:
Ha1: Board of Directors effectiveness has a
negativeeffect on firm risk
2.5 Board of Directors Effectiveness
and IR Quality
King III (2009) requires boards to ensure and verify
IR integrity. This can be done in a way such as
delegating authority to audit committee to evaluate
disclosure of sustainability, ensuring that published
IR has included issues of going concern, and
illustrated positive and negative impacts of the
company's operations and plans to improve positive
things and reduce impact of negative things. Alfiero
et al. (2017) documented a positive relationship
between board characteristics to IR adoption. Thus,
it is expected that an effective BOD will be able to
better monitor financial and non financial reporting
and improve IR quality. Frias-Aceituno et al. (2012)
found that larger board sizes, boards with more
experience, and more board diversity can result in an
increasingly IR quality. It is expect that board
characteristics can create an increasingly effective
monitoring role which can lead to better IR quality.
Based on the description above, the next hypothesis
is:
Ha2: Board of Directors effectiveness has positive
effect onIntegrated Reporting Quality
2.6 Integrated Reporting Qualityand
Firm Risk
IR essentially integrates ESG factors into
strategies, output measurements and assessments of
risks and opportunities faced by firms (Steyn, 2014).
ESG factor disclosed may reduce firm risk (Sassen
et al., 2016). Lower level of corporate social
performance tends to increase the likelihood of
lawsuits faced by companies, whereas companies
with high levels of social performance can reduce
financial risk and market participants are more
willing to allocate capital so as to lower capital limit
for firms (Cheng, Green, Conradie, &Romi, 2014).
Better corporate social performance can also meet
stakeholder information needs, enhance corporate
reputation, enhance brand value, improve corporate
image, and create moral capital (Sassen et al., 2016).
Sassen et al. (2016) documented a negative
relationship between social performance and firm
risk, meaning that there was a decrease in risk (ie
systematic and total risk) in companies with high
social performance. Furthermore, idiosyncratic risk
also declines when firms have high environmental
performance, but negative effects of environmental
performance with systematic risk and total risk apply
only to industries that are environmentally sensitive.
Based on the description, high IR quality is expected
to decrease firm risk. This is because better IR
quality indicates ESG factor has been well integrated
in IR. Thus, the next hypothesis in this study is:
Ha3: IR quality has a negative effect on firm risk
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114

2.7 Board of Directors Effectiveness,
IR Quality, and Firm Risk
The effect of BOD effectiveness on firm risk has
been proven by previous research. Mathew et al.
(2018) documented that board attributes of
composition, leadership structure, characteristics,
and board processes are negatively related to firm
risk. This is because board attribute can determine
how the board performs role of controls, services,
and strategies that can affect results and performance
of company and it is expected that these board
attributes can reduce firm risk through its impact on
strategic direction of management functions and
controls (Mathew et al., 2018). Although the
relationship of BOD effectiveness and firm risk has
been demonstrated, board actually has many roles
which role does not only focus on managing firm
risk. For example monitoring role of corporate
reporting, this role has been set in King III (2009)
i.e. board must ensure and verify IR integrity. On the
other hand, company reports (in this case IRs) are
among the sources of information considered by
investors in assessing company, moreover this study
measures firm risk by using market risk. So through
IR, it is expected to reduce firm risk because board
plays a role in monitoring IR process and then can
affect IR quality generated and qualified IR is
expected to reduce firm risk because in assessing
company, information in IR become one of
considerations by investors to take decision.
Ha4: Board of Directors effectiveness has a negative
effect on firm risk through enhanced
integrated reporting quality
3 METHOD
Population of this study are all public companies
listed on Johannesburg Stock Exchange (JSE), South
Africa. The sample was chosen by using purposive
sampling technique. The reason of selecting this
sample is because South Africa was first country to
require listed companies on JSE to issue an IR or
explain reasons for not complying. BOD
effectiveness and IR quality data are obtained from
the company's annual report accessed from the
official JSE website or official website of each
company. Listed companies on JSE numbered 488
companies. Then, this study excluded companies
that include in financial industry as much as 119;
companies that do not issued IR 2014 to 2017 of 56
companies; companies with unavailable and
incomplete data of 157 companies; and companies
with data outliers of 11 companies. The final sample
numbered 143 companies with 4 years of
observations. So the number of observations is 572
Firms-Years.While financial data to measures other
variables obtained from datastream accessed through
Pusat Data EkonomidanBisnis (PDEB), Universitas
Indonesia. Structural Equation Modeling (SEM) is
used to data analysis with Stata Version 13 software.
The use of SEM aims to prove hypotheses of this
study that examines the direct and indirect effects.To
test hypotheses, this study uses two research models,
as follows:
Hypotheses 1 and 3 were tested using Model 1 as
follows:
RISKit = α
0
+ α
1
BODit + α
2
IRQit + α
3
SIZEit +
α
4
ROAit + α
5
LEVit + α
6
MTBit +
α
7
DPRit-1 + α
8
IND + α
9
YEAR +
ε
it
..............................................(1)
With an expectation: H
1
: α
1
< 0, H
3
: α
2
< 0
Hypothesis 2was tested using Model 2 as follows:
IRQit = β
0
+ β
1
BODit + β
2
SIZEit + β
3
ROAit +
β
4
LEVit + β
5
MTBit + β
6
IND +
β
7
YEAR+ ε
it
..............................(2)
With an expectation: H
2
: β
1
< 0
Hypothesis4was tested using the following model:
RISKit = λ
0
+ λ
1
IRQit + λ
2
BODit + λ
3
SIZEit +
λ
4
ROAit + λ
5
LEVit + λ
6
MTBit +
λ
7
DPRit-1 + λ
8
IND + λ
9
YEAR +
ε
it
...............................................(3)
With an expectation: H
4
: λ
2
< 0
The above four models of research refer to
Violita et al. (2014). Description of each variable is
presented in Table 1.
Board of Directors Effectiveness, Integrated Reporting Quality, and Firm Risk
115

Table 1: Description of Research Variables
Variables
Description
IRQ
IR quality is measured using keyword searches referring to IIRC (2013) and Zhou et al. (2017) with
NVIVO software. Keywords are presented in Appendix 1
BOD
Board of directors effectiveness is measured by content analysis based on Hermawan (2011)
(Appendix 2)
RISK
Firm risk is measured by standard deviation of daily stock returns over 12 months from April to
March (Sassen et al., 2016; Mathew et al., 2018)
SIZE
Firm size is measured using the natural logarithm of total assets (Baboukardos&Rimmel, 2016;
García-Sánchez &Noguera-Gámez, 2017; Lee & Yeo, 2016)
ROA
Profitability is measured by using ROA is net profit divided by total assets (Haji &Anifowose,
2016).
LEV
Leverage is measured by using total liabilities divided by total assets (Hajj &Anifowose, 2016; Lee
& Yeo, 2016).
MTB
Growth is measured using market-to-book ratio is market value of equity divided by book value of
equity (García-Sánchez &Noguera-Gámez, 2017).
DPR
Dividends are measured using Dividend Payout Ratio (DPR) of previous year (Sassen et al., 2016)
IND
Industry types is measured by dummy variables (Baboukardos&Rimmel, 2016)
YEAR
Year of this study as a control with dummy
3.1 Measurement of Integrated
Reporting Quality
This study uses keywords to measure IR quality
with NVIVO10 software. Keywords that have been
inputted in NVIVO will show percentage coverage
value. Fernando (2018) states that percentage of
keywords coverage are percentage of keywords
number against all words disclosed in corporate
report. Keywords used in this study are presented in
Appendix 1.
3.2 Measurement of Firm Risk
This study measures firm risk using standard
deviations from daily stock returns over the previous
12 months (Sassen et al., 2016; Mathew et al.,
2018). The period used is from April to March.
3.3 Measurement of Board of Directors
Effectiveness
BOD effectiveness is assessed by using question
checklist based on their characteristics ie
independence, activity, size, and competence. The
checklist was developed from Hermawan (2011)
which consisted of 20 questions for BOD
effectiveness. There are 3 possible assessments for
each question: Good, Fair, and Poor, but there are a
few questions that have only 2 possible assessments:
Good and Poor. Each assessment is rated 3 for
Good, 2 for Fair, and 1 for Poor or for inadequate
information. Maximum score is 60 and minimum 20.
Scores obtained from each company then divided by
total maximum score, so value of BOD effectiveness
ranged from 0 to 1. The questionnaire used in
checklist is presented in Appendix 2. This study then
conducts Cronbach Alpha testing to test the
reliability of these questions.
4 RESULT AND DISCUSSION
4.1 Description Statistics
Table 2 shows descriptive statistics. Based on
Table 2, it shows that companies listed on JSE have
an average risk of 2.68%, firm risk variable shows a
standard deviation value of 0.0215 which means that
the data variation is quite low and data is normally
distributed. IR quality variable shows an average
value of 0.1855 which means that on average firms
listed on JSE reveal 18.55% IR elements of total
information disclosed in company report. The IRs
issued by Sasol Limited 2015 has highest quality of
21.5% in which earned an award from EY in 2015 as
one of the best IRs. However, Table 3 shows that the
average value of IR quality variables each year is not
very different i.e. only between 18.3% to 18.8%,
indicating that IR quality in South Africa is not
growing significantly. BOD effectiveness variable is
good because it shows average value of 84,17%.
Sasol Limited is also one of the companies that has
an BOD effectiveness value of 83.
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116

Table 2: Descriptive Statistics
Variabel
Mean
St. Dev
Min
Max
RISK
0,0268
0,0215
0,0000
0,2067
IRQ
0,1855
0,0092
0,1445
0,2150
BOD
0,7872
0,0479
0,6167
0,9000
SIZE (Thousands of
Rand)
19.685.240
44.740.709
42.515
398.939.000
SIZE (Ln)
22,1908
1,9188
17,5654
26,7121
ROA
0,0733
0,1107
-0,3498
0,6300
MTB
2,4304
2,7003
-2,6053
23,5078
LEV
0,4978
0,1924
0,0020
2,1997
DPR
0,1715
0,2818
0,2038
1,8851
IND
0
1
YEAR
2014
2017
Description: Mean is average value of variable. Std. Dev is standard deviation of variable. Min is minimum value.
Max is maximum value. RISK is a dependent variable, ie firm risk as measured by standard deviation of daily stock
return for 12 months from April to March. IRQ is a mediation variable that is IR quality measured by keyword
search in IR using NVIVO software. BOD is an independent variable, ie BOD effectiveness as measured by a
manual check on the company's annual report. SIZE is a control variable that is firm size measured by using Ln value
of total assets. MTB is a control variable that is growth measured by using market-to-book ratio. ROA is a control
variable that is profitability measured by return on assets is net profit divided by total assets. LEV is a control
variable that is the level of debt measured by total debt divided by total assets. DPR is a control variable that is
dividend measured by using dividend payout ratio. YEAR is a control variable that is the year of study measured by
dummy varibel 1 and 0. IND is control variable that is industrial type measured with dummy variable 1 and 0.
Table 3: Average of IR Quality Scores Each Year
Year
Average
2014
0,1846
2015
0,1839
2016
0,1857
2017
0,1879
4.2 Reliability of Board of Directors
Checlist
Table 4 shows BOD cronbach alpha value of
0.6407. According to Hermawan (2011) there is no
statistical test of standard significance for alpha
values. However, alpha coefficient of BOD score in
this study is not much different from alpha
coefficient value for checklist board of
commissioner in Hermawan (2011) that is 0,607 and
not much different from coefficient alpha value of
disclosure index in Botosan (1997) that is equal to
0,64. Thus, BOD scores used in this study are
considered valid enough.
Table 4: Cronbach Alpha Testing
Variabel
Cronbach Alpha
BOD
0,6407
Descriptions:
BOD = board of directors effectiveness
4.3 Hypotheses Testing
4.3.1 Direct Effect Testing of Model 1
Table 5 shows a significant negative effect
between BOD effectiveness against firm risk seen
from 0.000 with negative coefficient (H1 accepted).
More effective BOD, the BOD can provide strategic
direction for better management and control
functions (including risk management). Mathew et
al. (2018) found that board attributes consisting of
composition, leadership structure, characteristics and
board processes negatively affect firm risk. Bernile
et al. (2016) documented that BOD diversity can
reduce the volatility of stock returns because board
diversity tends to adopt a more stable and less daring
policy in financial risk taking.
Board of Directors Effectiveness, Integrated Reporting Quality, and Firm Risk
117

However, this study can not prove the effect of
IR quality on firm risk (H3 is unacceptable). This
can be seen from significance value of 0.313 which
is greater than alpha. IR implementation in South
Africa has been mandatory, so all companies listed
on JSE have published IR. Many companies have
not complied with the rules and only provided
explanations for the reasons behind their
disobedience to the regulation. Therefore, IR can not
be used as a signal to reduce firm risk because IR
quality is not much different between companies in a
state that is already mandatory. Descriptive statistics
also indicate that the IR quality level is very low and
has not experienced significant progress from year to
year. It is also supported by the analysis done by the
researcher that many companies provide an
explanation ("explain") in their IR, which indicates
that many companies do not fully comply with the
IIRC framework or do not reveal IR content
elements.
Table 5: Direct Effect (Model 1)
Research Model:
RISKit = α
0
+ α
1
BODit + α
2
IRQit + α
3
SIZEit + α
4
ROAit + α
5
LEVit + α
6
MTBit + α
7
DPRit-1
+ α
8
IND + α
9
YEAR + ε
it
.......................(1)
Prediction
Coef.
Sig.
Constant
0,2303
0,000***
BOD
-
-0,1011
0,000***
IRQ
-
0,0425
0,313
SIZE
-
-0,0032
0,000***
ROA
-
-0,0202
0,007***
LEV
+
0,0082
0,0295**
MTB
-
-0,0004
0,1505
DPR
-
0,0055
0,0535*
IND
Yes
YEAR
Yes
Adjusted R-squared
0,3489
Prob(F-Statistics)
0,003
*** significant at α=1%, ** significant at α=5%, *significant at α=10%
Description:
BOD = board of directors effectiveness, IRQ = integrated reporting quality, SIZE = firm
size, MTB = firm growth, ROA = profitability, LEV = debt ratio, DPR = dividend payout
ratio, IND = dummy industry, YEAR = dummy year
4.3.2 Direct Effect Testing of Model 2
Table 6 shows that BOD effectiveness has no effect
on IR quality. This is seen from the significant value
of BOD of 0.436 (greater than alpha) which means
that BOD effectiveness does not affect IR quality
(H2 is unacceptable). The results of this study
support Hurghis (2017). Hurghis (2017)
documented that BOD characteristics (which are the
determinants of BOD effectiveness) such as
percentage of independent non-executive directors,
gender CEOs, duality CEOs, CEO and women board
changes do not affect the company's issued IR
expansion because the IR framework principles and
guidelines are still flexible and IR is still a new so
training is still needed for companies to publish IRs.
This indicates that the board's ability to publish IRs
is lacking, so companies generally only issue IRs at
a minimal level or just to meet the applicable of
regulatory requirements of King III (2009).
Additional testing result shows that each board
characteristic has no effect on board quality except
independence. This indicates that only the
independence of the board has a significant positive
effect on IR quality which means that board
independence can improve IR quality. An
independent board is considered as an important
mechanism for controlling manager activities and
ensuring that the objectives of shareholders are
achieved. An independent board is expected to be
able to apply greater objectivity and independence in
managing the company, so as to encourage
improvement of the quality and quantity of
information disclosed (Frias-Aceituno et al., 2012).
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118

Table 6: Direct Effect (Model 2)
Research Model:
IRQit = β
0
+ β
1
BODit + β
2
SIZEit + β
3
ROAit + β
4
LEVit + β
5
MTBit + β
6
IND + β
7
YEAR+
ε
it
…...................................................(2)
Prediction
Coef.
Sig.
Constant
0,1562
0,000***
BOD
+
0,0022
0,436
SIZE
+
0,0015
0,000***
ROA
+
0,0096
0,006***
LEV
+
0,0038
0,034**
MTB
+
0,0001
0,267
IND
Yes
YEAR
Yes
Adjusted R-squared
0,1817
Prob(F-Statistics)
0,003
*** significant at α=1%, ** significant at α=5%, *significant at α=10%
Description:
BOD = board of directors effectiveness, SIZE = firm size, ROA = profitability, LEV = debt
ratio, MTB = firm growth, IND = dummy industry, YEAR = dummy year
4.3.3 Indirect Effect Testing of Model 3
Table 7 shows that IR quality can not mediate
the effect of BOD effectiveness on firm risk (H4).
Flower (2015) states that IIRC does not require
companies to include information on losses caused
by company activity (e.g. Environment) to IR. In
addition, IR is considered to have little impact on
corporate reporting practices. This is due to lack of
strength from IR regulatory body IIRC where IIRC
council is dominated by accounting profession and
multinational corporations determined to control the
rules that threaten their positions. As a result, IIRC
is considered a "regulatory capture".
Flower (2015) further explains that the IIRC
framework (which was used as the basis for IR
quality measurement in this study) failed for two
reasons, (1) this Framework does not require
company to report fully impact of its activities on
stakeholders,society, and environment; and (2) In IR
process, this framework involves too much corporate
management discretion. Therefore, even if company
applies this framework correctly, this report will still
have many shortcomings. In addition, IIRC can not
guarantee that the company has implemented IR
elements well. Thus, IR users can confidently
predict that the company does not disclose complete,
correct and comparable information about its
sustainability performance and its impact on
stakeholders, society and environment. In addition,
IRs can not provide the information society needs to
assess company performance (Flower, 2015).
4.3.4 Additional Testing Analysis
Additional analysis aims to obtain additional
results and analysis by making changes in the
research model. Hermawan (2011) and Haji &
Anifowose (2016) performed additional analyzes by
examining the effect of each characteristic used to
measure BOD effectiveness. This research tries to
see the influence of these characteristics on firm risk
directly or indirectly through IR quality. Additional
analysis test results are presented in Table 8. Based
on table 8, for model 1 it is seen that each
characteristic of BOD has negative effect to firm
risk, while IR quality does not affect IR quality.
These results are consistent with the main tests in
this study that BOD effectiveness may reduce firm
risk and there is no effect of IR quality on firm risk.
For model 2, overall test results show same thing as
the main test, but BOD independence can improve
IR quality. While other have no effect on IR quality.
The indirect effect test indicates that the results are
consistent with main test that IR quality can not
mediate influence of each BOD characteristics on
firm risk.
Table 7: Indirect Effect
Variable
Risiko
Perusahaan
Coef.
Sig.
BOD
0,0000
0,439
Prob F
0,003
*significant at α=10%, **significant at α=5%,***
significant at α=1%
Board of Directors Effectiveness, Integrated Reporting Quality, and Firm Risk
119

Table 8: Additional Testing Results
Variabel
Model 1
Dependen Variable:
RISK
Model 2
Dependent Variable:
IRQ
Indirect Effect
Coef.
Sig.
Coef.
Sig.
Coef.
Sig.
Constan
0,2333
0,000***
0,1562
0,000***
0,2333
0,000***
IRQ
0,1524
0,4315
BOD_INDEPENDENCE
-0,0012
0,0245**
0,0005
0,0365**
0,0000
0.4315
BOD_ACTIVITIES
-0,0014
0,009***
0,0002
0,2695
0,0000
0.4340
BOD_SIZE
-0,0019
0,057*
-0,0006
0,1225
-0,0000
0.4320
BOD_COMPETENCE
-0,0023
0,000***
-0.0004
0,1990
-0,0000
0.4320
SIZE
-0,0034
0,000***
0,0012
0,0000***
ROA
-0,0190
0,011**
0,0099
0,0055***
MTB
-0,0003
0,135
0,0001
0,2660
LEV
0,0084
0,0275**
0,0034
0,0490**
DPR
0,0055
0,054*
IND
Yes
Yes
Yes
YEAR
Yes
Yes
Yes
5 CONCLUSION
This study aims to provide empirical evidence
the effect of BOD effectiveness on firm risks
directly and indirectly through IR quality. Research
samples are 143 companies with 4 years observation
that is 2014 until 2017, data analysis using Structural
Equation Model. The results showed that BOD
effectiveness has a significant negative effect on
firm risk, BOD effectiveness has no effect on IR
quality, and IR quality has not affect firm risk. The
results of this study have implications for regulators,
especially in Indonesia that need to do a good
consideration if want to require IR practices in
Indonesia. This study has some limitations:
searching keywords for IR quality only captures how
much information disclosure but cannot assess how
information quality is disclosed, sample of this study
uses only one country i.e. South Africa, using only
one proxy for risk measurement i.e. total risk, and
this study combine 8 elements of IR content, so the
results of each content element cannot be analysed.
Further research may consider the limitations in this
study.
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