The Relationship between Corporate Diversification, Corporate Governance and Corporate Social Performance in Indonesian Companies

The effect of corporate diversification on behaviour of business towards stakeholder demands and social concerns has been overlook, especially in product diversification both related and unrelated diversification.

This study investigates the relationship between corporate diversification (CD) (i.e. related, unrelated and international diversification) and Corporate Social Performance (CSP) in Indonesian listed companies. It explores the moderating effect of corporate governance (CG) (e.g. independent commissioner and ownership concentration) on the correlation between corporate diversification and CSP.
This study takes 203 listed companies from the Indonesian Stock Exchange as the sample. It applied company annual report, Indonesian Capital Market Directory and Osiris database as sourced of data. Moreover, content analysis based on 80 indicators of Global Report Initiative is used to measure CSP, while multiple regression with one-year lag dependent variables is used as the primary data analysis. The result of multi regression analysis shows that related and unrelated diversification produced different outcomes whereby related diversification is negatively correlated with CSP. Unrelated diversification, conversely, reveals a positive relationship with CSP. Moreover, unrelated diversification is more positively correlated to CSP than the related CD, while international diversification also has a positive relationship with CSP. Furthermore, an independent commissioner could strengthen the CD-CSP relationship with regards to unrelated and international diversification. Conversely, ownership concentration could weaken the CD and CSP relationship for related diversification.

In conclusion, this study contributes to theoretical development (i.e. it explains the link between product diversification, international diversification and CSP in emerging economies setting. It extends previous studies by considering the role of CG as a moderator, and uses content analysis based on GRI indicators in measuring CSP). Additionally, it has managerial implications, including a manager needs to consider CD and carefully manage the demands of an extensive range of stakeholders to increase CSP. Second, in order to maximise the impact of corporate diversification strategy on CSP, a manager has to think sensibly, based on the CG dimensions in the company, such as the number of independent commissioners and ownership concentration. Third, this study provides input to managers who run their businesses in emerging economies that have some differences with developed economies, for instance local rules, regulations and governmental control. Fourth, it also has an impact on the economy of Indonesia. For example, the government should establish regulations suitable for several types of industry and encourage the listed companies to implement good CG. Finally, limitations and further research directions are discussed.