Assessing the impact of sustainability report disclosures and CEO attributes on the Indonesian energy sector: implications for capital market performance

Ahadiat, Ayi; Shamim, Amjad; Jimad, Habibullah; Kesumah, Fajrin Satria Dwi Article Assessing the impact of sustainability report disclosures and CEO attributes on the Indonesian energy sector: implications for capital market performance Cogent Business & Management Provided in Cooperation with: Taylor & Francis Group Suggested Citation: Ahadiat, Ayi; Shamim, Amjad; Jimad, Habibullah; Kesumah, Fajrin Satria Dwi (2024) : Assessing the impact of sustainability report disclosures and CEO attributes on the Indonesian energy sector: implications for capital market performance, Cogent Business & Management, ISSN 2331-1975, Taylor & Francis, Abingdon, Vol. 11, Iss. 1, pp. 1-16, https://doi.org/10.1080/23311975.2024.2392044 This Version is available at: https://hdl.handle.net/10419/326496 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Cogent Business & Management ISSN: 2331-1975 (Online) Journal homepage: www.tandfonline.com/journals/oabm20 Assessing the impact of sustainability report disclosures and CEO attributes on the Indonesian energy sector: implications for capital market performance Ayi Ahadiat, Amjad Shamim, Habibullah Jimad & Fajrin Satria Dwi Kesumah To cite this article: Ayi Ahadiat, Amjad Shamim, Habibullah Jimad & Fajrin Satria Dwi Kesumah (2024) Assessing the impact of sustainability report disclosures and CEO attributes on the Indonesian energy sector: implications for capital market performance, Cogent Business & Management, 11:1, 2392044, DOI: 10.1080/23311975.2024.2392044 To link to this article: https://doi.org/10.1080/23311975.2024.2392044 © 2024 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group Published online: 22 Aug 2024. Submit your article to this journal Article views: 1630 View related articles View Crossmark data Full Terms & Conditions of access and use can be found at https://www.tandfonline.com/action/journalInformation?journalCode=oabm20 ManageMent | ReseaRch aRticle Cogent Business & ManageMent 2024, VoL. 11, no. 1, 2392044 Assessing the impact of sustainability report disclosures and CEO attributes on the Indonesian energy sector: implications for capital market performance ayi ahadiata , amjad shamimb , habibullah Jimada and Fajrin satria Dwi Kesumaha aDepartment of Management, universitas Lampung, indonesia; bDepartment of Management and Humanities, institute of self-sustainable Building, universiti teknologi Petronas, Malaysia ABSTRACT the growth of the world energy market is experiencing a slowdown moment in line with the decline in demand due to the cOViD-19 pandemic. While indonesia has the potential for energy resources and natural resources which are very diverse and abundant, on the one hand, it has not been utilized optimally. this study aims to analyze the impact of general sustainability report disclosures and ceO attributes of indonesian energy companies on company value, measured using tobin’s Q indicators. the analysis is based on gRi standards for sustainability reports, ceO education levels, and ceO affiliation relationships, with control variables including ROe, firm size, leverage, and asset growth. this study uses annual report data and sustainability reports for every indonesian energy company listed on the indonesian stock exchange for the past four years. the estimation model used in the analytical method is multiple linear regression analysis. the results of this study indicate that on average indonesian energy companies have general disclosures on sustainability reports that have a negative effect on tobin’s Q indicators, the education level of the ceO has a positive effect on the tobin’s Q indicators, and the ceO’s affiliation relationship which has no effect on the tobin’s Q indicators. Introduction the global energy market’s growth has been declining due to the covid-19 pandemic, primarily driven by policies limiting global activities (Mehlig et al., 2021). in 2021, the repeal of these policies spurred economic recovery, leading to increased energy consumption and higher prices (Zhang & Dilanchiev, 2022). this trend boosted the profits of major global energy companies such as British Petroleum, total energies, shell, and chevron. British Petroleum had a profit record of UsD12.85 billion throughout 2021, which was the highest record for the last 8 years; total energies had a higher profit record of UsD18.1 billion than the previous year, which suffered a UsD7.2 billion loss; shell had a profit record of UsD19.3 billion and a loss of UsD7.2 billion in the previous year; and chevron managed to record UsD15.6 billion and suffered a loss of UsD5.5 billion in the previous year. specifically, in indonesia, the energy market remains an attractive market share for investors and the growth of energy companies, such as adaro, with a profit record of UsD1.03 million in 2021, from a previous profit of UsD158.5 thousand; indo tambangraya, with a profit record of UsD475.39 thousand in 2021, from a previous profit of UsD37.8 thousand; and Pertamina, with a profit record of UsD364.53 thousand in 2021, from a previous loss of UsD215.77 thousand. these profits allowed energy companies to develop a new Renewable energy (nRe) business (Palm, 2006) and other low-carbon businesses to reduce carbon and greenhouse gas (ghg) emission levels (nishitani et al., 2016). © 2024 the author(s). Published by informa uK Limited, trading as taylor & Francis group CONTACT Fajrin satria Dwi Kesumah [email protected] Department of Management, universitas Lampung, indonesia. https://doi.org/10.1080/23311975.2024.2392044 this is an open access article distributed under the terms of the Creative Commons attribution License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. the terms on which this article has been published allow the posting of the accepted Manuscript in a repository by the author(s) or with their consent. ARTICLE HISTORY Received 13 March 2024 Revised 9 July 2024 accepted 11 July 2024 KEYWORDS indonesia energy companies; sustainability report; global reporting initiative (gRi;), corporate value; ceO education level; ceO affiliate Relations SUBJECTS Business, Management and accounting; economics; industry & industrial studies JEL g20; M12; Q28; Q43; Q56 2 a. ahaDiat etal. the energy sector is currently discussing efforts to reduce global warming (Papadis & tsatsaronis, 2020), and the current global energy trends indicate that society will shift to clean energy (gielen et al., 2019; Mihalciuc & grosu, 2022). energy companies have started following this trend to provide clean energy (cook, 2021), and to improve the sustainability of their energy enterprises (Wysokińska-senkus, 2021). Moreover, using nRe reduces international communities’ ghg emission rates (Yoro & Daramola, 2020). the international world commitments are based on the Kyoto Protocol in 1997 and the Paris agreement 2015, aiming to mitigate the rising global temperature. likewise, the indonesian government committed to achieving emission reduction targets in the energy sector by implementing various mitigation actions and accurately monitoring ghg. in 2019, the indonesian Financial services authority (OJK) issued Regulation no. 51/POJK.03/2017, which mandates financial services institutions, issuers, and public companies to prepare and submit sustainability reports. this regulation marked a pivotal shift towards more stringent sustainability practices and increased transparency in reporting (OJK, 2017). the implementation and impact of this regulation became more pronounced from 2019 onwards, as companies adapted to meet these new requirements. Furthermore, in 2020, the Ministry of environment and Forestry issued Regulation no. P.75/MenlhK/ setJen/KUM.1/10/2019, which provided detailed guidelines on the preparation of sustainability reports, emphasizing the integration of environmental, social, and governance (esg) criteria (Ministry of environment and Forestry, 2019). these guidelines aligned with international standards such as the global Reporting initiative (gRi), encouraging indonesian companies to adopt globally recognized best practices in sustainability reporting. additionally, the energy-producing industry is the largest in the emission contributor category in indonesia, amounting to 43.83%, as shown in Figure 1. thus, indonesia has the potential for diverse and abundant energy and natural resources (ekananda, 2022). however, these cannot be utilized optimally due to technological and financial constraints (Fatimah et al., 2020), which company leaders or chief executive Officers (ceOs) must resolve. hence, ceOs of energy companies must synergize to transition government policies in achieving emission reduction targets (gürsan & de gooyert, 2021; Yuan et al., 2020). this change encourages companies to use renewable energies and seize opportunities to transition public consumption into clean energy (su & Urban, 2021). thus, renewable energy sources can reduce dependence on environmentally harmful energy resources and increase national energy security, harnessing several types of primary energy resources. to get the right results, current developments require ceOs to have sensitive, innovative, and transformational leadership spirit and strong instincts (soomro etal., 2020). in fact, they should resolve global warming and environmental issues, the focus of international attention. Related to this, companies need a ceO with a transformational leadership spirit, especially in the energy sector, the biggest contributor of ghg, resulting in global warming. this condition requires companies to take preventive measures by protecting the environment to reduce negative environmental impacts (Omri & Belaïd, 2021). in addition, Figure 1. Contribution of greenhouse gas emissions in 2019. Source: Pusdatin esDM (2020). cOgent BUsiness & ManageMent 3 the value of a company is based on its financial and organizational performances related to corporate social Responsibility (csR) (hassan et al., 2020). according to Manisa and Defung (2018), besides pursuing profits, companies must also fulfil community welfare (people) and maintain environmental sustainability (planet), also known as the concept of triple Bottom line—people-planet-profit. Various issues related to environmental destruction and social issues raise public awareness regarding the importance of environmental and corporate performances. this awareness makes companies compete for transparency in disclosing company information. Report transparency is a company communication tool to internal and external parties, such as corporate social Responsibility (csR) report, especially the sustainability report as environmental and social corporate responsibilities. a sustainability report remains voluntary in various countries, including indonesia, but the high enthusiasm for publishing it shows that companies integrate these aspects and good governance. sustainability reports are prepared based on sustainability reporting system standards the global Reporting initiative (gRi) set. ceOs’ decision-making requires various knowledge and information (Waheed & Malik, 2019). the incompatibility of the applied leadership style will demotivate a company’s employees, making business continuity weak (Koeswayo etal., 2024). high levels of education for ceOs have the potential to contribute knowledge, perspectives, and the ability to understand various concepts (Bantel & Jackson, 1989). higher education reflects a ceO’s thoughts and abilities in dealing with challenging intellectual activities, and the connections gained during lectures can be useful professionally in the future (ahadiat et al., 2023; saidu, 2019). Decision-makers with a high level of education have an excellent mindset and analysis in responding to problems and making decisions (Kokeno & Muturi, 2016). also, the family and financial affiliations the ceO has within a company influence decision-making (Maulidyani et al., 2017). several previous studies stated that ceO attributes positively affect firm value (erlim & Juliana, 2017) because tobin’s Q reflects a company’s value evaluation by the market used by investors. tobin’s Q also reflects opportunities for a company’s growth. thus, investors consider the education level of a ceO in assessing a company’s prospects. Meanwhile, ilham (2018) & sudana and Dwiputri (2018) found that educational level may only affect investors in selecting a company’s ceO; a ceO’s education level does not significantly affect the firm performance. While many studies of affiliation are still based on family relationships, such as Komalasari and nor (2014), stating that if a family only acts as a shareholder and is dormant in managing the company, a company’s performance will be poor. however, if family members participate in managerial activities, then a company’s performance will increase. Meanwhile, a study on sustainability reports conducted by Widyastuti (2021) found that csR disclosure positively affects company value; csR disclosure provides a positive image obtained from the community, increasing its value and investors’ interest in investing in companies with a positive reputation. company. in contrast to the results of this study, sholikhah and Khusnah (2020) found that social sustainability reports negatively affect firm performance, rendering this research insignificant, and it will negatively affect firm performance. this concurs with the study by nofianto and agustina (2014), stating that together a sustainability report, does not significantly affect a firm performance. given these inconsistent findings, this study seeks to provide a comprehensive analysis of the general disclosures in sustainability reports and ceO attributes on the corporate value of indonesian energy companies from 2019 to 2022. By focusing on tobin’s Q as a measure of company value, and considering the roles of ceO education and affiliation, this research aims to offer new insights into the factors driving the performance and sustainability of energy companies in indonesia. Literature review and hypothesis development the echelon theory forms the main theory of this research. it was proposed by hambrick (2018), states that the ceO of a company is guided by his understanding of the world to achieve the vision and strategic goals of the company. a ceO’s understanding of the world is based on his values or attributes, such as experience, educational background, functional background, and other demographic factors. this theory explains the influence of the top management team on the company. Based on this, ceOs with a transformational leadership spirit are proxied by company policies, leading to disclosing sustainability reports to comply with the gRi standards, education level, and affiliation in determining the direction of ceO policies. 4 a. ahaDiat etal. Furthermore, corporate social Responsibility (csR) and environmental, social, and governance (esg) criteria are essential frameworks in contemporary business practices, focusing on ethical, sustainable, and socially responsible conduct (Karwowski & Raulinajtys-grzybek, 2021). csR refers to a company’s efforts to positively impact society, the environment, and the economy (Kanji & chopra, 2010). it encompasses various activities, including philanthropy, ethical labor practices, and environmental conservation (carroll, 1999). csR is rooted in the belief that businesses should operate in ways that enhance society and the environment, rather than contribute negatively to them. environmental, social, and governance (esg) criteria, on the other hand, are a set of standards for a company’s operations that socially conscious investors use to screen potential investments (syed, 2017). environmental criteria consider how a company performs as a steward of nature. social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights (eccles et al., 2014). Sustainability report the sustainability Report, which includes financial, environmental, and social aspects, is a form of corporate responsibility to the surrounding environment (Manisa & Defung, 2018). each company will publish this report yearly. the sustainability Report can be used to measure company achievement; in this case, work targets are used as a measuring tool for work achievement and as a media consideration in investing for investors. the last function of the media, government, academics, and consumers is being a benchmark in assessing a company’s commitment to conduct sustainable development. Disclosing the sustainability report refers to gRi standards, an international nonprofit organization for the public interest with a vision of a sustainable global economy in which organizations manage economic, environmental, social, and governance performance and impacts responsibly (heras-saizarbitoria etal., 2022). the gRi standards are a framework for preparing sustainability reports to create a common understanding for organizations and stakeholders (global Reporting, 2021), so that information on the economic, environmental, and social impacts of various organizations can be communicated, understood, and compared globally. gRi provides sustainability Reporting guidelines for companies of all sizes in all sectors to help them collect, analyse, and publish their sustainability data. this maintains comparability between each sustainability report. Furthermore, comparable and good quality sustainability information can increase transparency and accountability of organizational performance for stakeholders (Junior et al., 2014). Based on this description, the first hypothesis can be formulated as follows: h1: Public disclosure of sustainability reports negatively affects company value CEO education level according to Papadakis and Bourantas (1998), education level is a demographic variable used to predict company performance and new ideas. this factor posits that when a ceO has a high education level, a company achieve success. according to Bhagat et al. (2010), educational background affects a ceO’s ability in three ways. First, education can provide knowledge and perspectives, including understanding technical concepts and abstract techniques. second, a high education can be a picture of ceO intelligence and ability to deal with challenging intellectual activities. third, the connections gained in lectures can be useful professionally in the future. Previous studies by Jimad et al. (2023) and sudana and Dwiputri (2018) found that ceO education positively affects company performance. a ceO with an educational background in business has managerial knowledge of managing companies. however, the effect is insignificant. this shows that ceO education does not guarantee a company performance increase. ceOs with business education can manage companies with managerial skills, but understanding and knowledge of corporations also need attention. a study by ilham (2018) also found that educational level may only affect investors in the ceO selection process for a company, but the ceO’s education level does not significantly affect the firm value. Meanwhile, the different results by erlim and Juliana (2017) found that the level of ceO education has a cOgent BUsiness & ManageMent 5 positive effect on company performance. tobin’s Q reflects the evaluation of the value of a company by the market used by investors. tobin’s Q also reflects a company growth opportunity so that it can be concluded that the level of ceO education is a consideration of investors in assessing the prospects of a company. Based on this description, the hypothesis is formulated as follows: h2: the education level of the ceO positively affects firm value. CEO affiliate Relations ceO affiliate relationships can be categorized based on family and financial relationships. Previous studies conducted by Maulidyani et al. (2017 and Yustika and azib (2018) found that affiliation negatively affects company performance. Different results are shown by Rahmanto and lestari (2020), stating that the diversity of family members’ directors and nonfamily members in family companies positively influences the firm value because a combination of family members serving as directors tends to concentrate on company wealth, resulting in strong attitude incentives to increase a company’s profitability. ceOs with this particular affiliation have stronger ties to the company. hence, they will run the company optimally to achieve good performance, allowing them to receive benefits from affiliate relationships or the shares they own. this concurs with the study by Komalasari and nor (2014), stating that if a family only acts as a shareholder and is dormant in managing the company, the company’s performance will be poor. however, if family members participate in managerial activities, then the company’s performance will increase. Based on this description, the hypothesis can be formulated as follows: h3: affiliate relationship ceO positively affects firm value. to have more understanding the relationship between variables in hypotheses 1 to 3, research model is proposedly graphed as following Figure 2. Methods this research employed a comparative causal design to detect a causal relationship between two or more variables. this study analyses the ceO’s transformational leadership style in disclosing sustainability reports following the gRi standards, education level, and affiliation as independent variables of firm value as the dependent variable. this study also uses control variables, including ROe, size, leverage, and growth. the sample in this study includes the largest energy company in indonesia listed in the lQ45 index for four years from 2019 to 2022. lQ45 index is a stock market index used in the indonesia stock exchange (iDX), which measures the performance of the 45 most liquid stocks, the highest market capitalization, and the most sound financial performance, listed on the iDX. We identified the 20 largest energy companies indexed in lQ45, as of the most recent fiscal year available within the study period. Figure 2. Research Model. 6 a. ahaDiat etal. this criterion ensures that the sample represents the most significant players in the energy sector, providing a robust basis for our analysis. the dependent variable is the value of the company measured using tobin’s Q, which is widely used as a measure of firm value because it offers a comprehensive evaluation by comparing the market value of a firm’s assets to their replacement cost. this ratio provides insights into whether the market perceives the firm as creating or destroying value, with a q greater than 1 indicating value creation and a q less than 1 suggesting potential value destruction (lindenberg & Ross, 1981). Unlike purely accounting-based measures, tobin’s Q is forward-looking, incorporating market expectations about the firm’s future profitability and growth potential. it is also a valuable indicator for investment decisions, as firms with high tobin’s Q are often viewed as having better investment opportunities and the ability to generate returns on new investments that exceed their cost (Malkiel etal., 1979). Furthermore, tobin’s Q accounts for both tangible and intangible assets (hall, 1992), making it particularly relevant for firms with significant intangible assets like patents, trademarks, or brand value, which traditional accounting measures might not fully capture. its consistency and comparability across different industries, coupled with strong empirical support, make tobin’s Q a reliable predictor of firm performance, investment behavior, and market valuation (Butt et al., 2023). tobin’s Q can be calculated using the original formula as follows (tobin, 1969). Tobin s TA ′Q MVE D= + () / Where: MVE is the Market Value of equity (measured market value of stock equity with the number of shares outstanding x share price); D is total liabilities; and ta is total assets. the independent variables are defined as: 1. leadership style and general Disclosure Policy of sustainability Reports (gRi). leadership style is considered transformational when it significantly influences the strategic direction and operational practices of an organization. in this study, the transformational leadership style is linked to the general disclosure policy of sustainability reports, which adhere to the global Reporting initiative (gRi) standards. the gRi standards provide a comprehensive framework for sustainability reporting, ensuring consistency, transparency, and comparability across organizations. the proxy used for this variable is the extent of disclosure in sustainability reports, measured by the fulfillment of general disclosures as per gRi standards. this is quantified using the following formula, adapted from de Villiers et al. (2022): GRI disclosed general disclosure expected general disclosure =∑ ∑ this score represents the proportion of relevant sustainability indicators disclosed by the company, reflecting their commitment to transparency and adherence to international standards. 2. ceO education level (eDU). the education level of the ceO is a crucial variable in this study, as it represents a key attribute of transformational leadership. ceOs with higher educational qualifications are often better equipped with the knowledge and skills necessary to drive organizational success and adapt to complex business environments. in this study, ceO education level (eDU) is measured using a dummy variable: • a value of 1 is assigned if the ceO has a minimum of a master’s education background. • a value of 0 is assigned if the ceO does not have a master’s education background. this binary categorization allows for a clear distinction between ceOs with advanced educational qualifications and those without, facilitating the analysis of its impact on company value. 3. ceO affiliate Relations (aFi). ceO affiliate relations refer to the extent of a ceO’s affiliations with other companies, which can influence their decision-making and strategic direction. affiliations can provide ceOs with additional cOgent BUsiness & ManageMent 7 resources, networks, and insights, potentially impacting company performance. in this study, ceO affiliate relations (aFi) are measured using a dummy variable: • a value of 1 is assigned if the ceO has an affiliation relationship with another company. • a value of 0 is assigned if the ceO does not have any such affiliation. this variable helps to analyze whether affiliations contribute to or detract from company value, considering the potential for both beneficial networks and conflicts of interest. 4. control Variables to ensure the robustness of the analysis, several control variables are included in the regression model: • Return on equity (ln_ROe) this variable represents the profitability of the company relative to shareholders’ equity, log-transformed to normalize the data. it is an important indicator of financial performance. • company size (ln_siZe) Measured by the natural logarithm of the total assets, this variable controls for the impact of company size on firm value, as larger companies may have different operational dynamics and market perceptions compared to smaller ones. • leverage (ln_leV) the debt-to-equity ratio, log-transformed, is used to account for the financial leverage of the company. high leverage can indicate financial risk, which may influence investor perceptions and company value. • asset growth (ln_ag) this variable represents the growth in company assets over the period, log-transformed to ensure a normal distribution. asset growth can signal the company’s expansion and potential for future profitability. hence, unexamined external factors do not affect the influence of the independent variables on the dependent ones (gujarati, 1999). Multiple linear regression analysis is used to test each research hypothesis with the following equation model: Tobin sQ GRI EDU AFI ROE SIZE LEV AG e 12 34 5 6 7 ′=++ ++ + + ++αα ββ ββ ββ ββ ββ ββ ββ Results and discussion Statistic description to understand the data, we run the analysis based on their respective descriptive statistics as follows: table 1 is the statistical description of indonesia energy enterprises comprising 20 data observations. the firm value of tobin’s Q has a mean value of 124%, indicating that, on average, indonesian energy enterprises listed on lQ45 have overvalued conditions and successfully managed the company’s assets. that value has a minimum of 87% or <1, which happened in Pt. Perusahaan gas negara (Persero) tbk. in 2021, and a maximum of 200% owned by Pt. aneka tambang (Persero) tbk. in 2021. Furthermore, the mean value of the gRi variable is 84.41%. thus, on average, indonesian energy enterprises have mostly complied with sustainability reports with gRi standards, with minimum and maximum values of 58.92% Table 1. analysis results of descriptive statistics. n Minimum Maximum Mean std. Deviation tobin’s Q 20 0.873658 2.009599 1.24313015 0.329841975 gRi 20 0.589286 1.000000 0.84410715 0.187918052 eDu 20 0 1 0.80 0.410 aFi 20 0 1 0.25 0.444 Roe 20 −.073007 0.614960 0.18289610 0.175713776 siZe 20 20.870503 31.445634 25.77527360 4.501004226 LeV 20 0.353743 1.549194 0.68437965 0.349859554 ag 20 −0.195541 0.746862 0.12129972 0.255129362 Valid n (listwise) 20 14 a. ahaDiat etal. References ahadiat, a., Ms, M., syaipudin, U., & Kesumah, F. s. D. (2023). ceO power and characteristics on firm performance in indonesian state-owned enterprises. Contemporary Economics, 17(3), 295–310. https://doi.org/10.5709/ ce.1897-9254.511 Bantel, K. a., & Jackson, s. e. 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