Stakeholders Power, Environmental Performance and Financial Performance

BACKGROUND : Unlike prior study that has concerned more with the ex-post effect of good environmental performance on the financial performance, this paper address the role of stakeholders power in driving managers to achieve a good environmental performance). This study aims to explore the stakeholders power behind the loyalty of management to achieve their best environmental performance and the financial benefit of having good environmental performance.

MATERIALS AND METHODS: This research adopts Ullmanns three-dimensional framework (1985) to explain stakeholder power. It was represented by shareholder power, creditor power, and government power. Companies that consistently follow PROPER in 2010-2017, listed in Indonesia Stock Exchange (IDX) and have the necessary data for research are selected as the research sample. The sample that met the criteria over the years 2010-2017 were 472 observations; however, after removing some of the missing values, the remaining data is 266 observations. This study includes several control variables that proved as the determinant of the company performance. The control variables consist of firm size, level of competitiveness and firm age.

RESULTS : We proposed two hypothesis in this study; the first is stakeholder power has a positive association with the environmental performance. The results support for the two proxies of stakeholder power, that is shareholder power and government power, each significant at < 0.01, while creditor power does not verify. However, creditor power still has a positive coefficient though it is not statistically significant. The first model of hypothesis 2 is also supported, in which PROPER statistically significant at <0,01. The higher the environmental performance, the better the financial performance. The result confirms that there is a significant contribution of the environmental performance to the financial performance. The second model of hypothesis 2 proves the opposite, where the stakeholder power has a negative effect on the firm performance.

CONCLUSION : This study finds that stakeholder power especially shareholders power and government power successfully encourages management to care about the environmental problems. This study also finds that good environmental performance significantly affect firm performance