The mediation effect of firm performance on the association between Two-tier Independent Boards and Green Innovation Practices: evidence from Indonesia

Abstract

Purpose: This research examines the role of firm performance in the effect of a two-tier independent board on green innovation practices.

Design/methodology/approach: This study employs a simple mediation model-4 using the Hayes Process approach to OLS regression with the R package. The dataset uses a total 518 public companies listed on the Indonesia Stock Exchange for 2017 to 2019, having 1,554 firm-year observations. 

Findings: The study revealed, based on the two-tier system, the role of a composite independent board on firm performance and green innovation is positive and significant. However, individual results for both independent commissaries and directors in terms of firm performance and green innovation practices are not significant. This result implies that a composite of independent boards is essential to reduce and mitigate the failure of corporate governance.

Research limitations/implications: This research only applied a sample of companies from one country which adopted two-tier system. Future research might apply as a comparative analysis of those countries group with two-tier system versus countries group with one-tier system.

Practical implications: First, companies need to enhance the knowledge and expertise of both independent directors and independent commissaries to improve their roles. Second, it is important to provide support for the campaign and incentives for green innovation practices. Third, insight drawn from this study leads to the latest regulation from the Financial Services Authority (as the representative of the Indonesian government), whereby independent directors are no longer mandatory for publicly listed companies starting in December 2021 and must be evaluated because the composite independent board is an effective tool to execute green projects and to accelerate the SDG agenda in 2030.

Social Implications: The social implication of this study is companies’ awareness to produce more eco-based products, which are expected by stakeholders, can be actualized. Also, public perception shows companies with green products have better performance.

Originality/value: This research is the first study examining the mediating role of firm performance on the effect of a two-tier independent board on green innovation practices. Second, this study introduces the latest methodology for the simple mediation model using a Hayes-based approach in the field of accounting with an open-source software R package.