THE INFLUENCE OF TOP MANAGEMENT TEAM COMPOSITION ON COMPANY PERFORMANCE

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1 | M a s t e r T h e s i s – J o y E l l y T u l u n g

THE INFLUENCE OF TOP MANAGEMENT TEAM

COMPOSITION ON COMPANY PERFORMANCE

THE CASE OF INDONESIA

BY

JOY ELLY TULUNG

S1713809

j.e.tulung@student.rug.nl

University of Groningen

Faculty of Business and Economic

MSc International Business & Management

Supervisor I: Dr. Kees Van Veen

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2 | M a s t e r T h e s i s – J o y E l l y T u l u n g PREFACE

Thanks to Jesus Christ for His kindness and grace I can finish my studies in University of Groningen.

I dedicate my thesis for my lovely wife, Shintya, for her pray and love and my children, Ezra, Gamaliel and Jireh, for their patience to waiting me and yearning to meet with me. I always motivated when remembered them.

I would like to thanks my supervisor Dr. Kees Van Veen for his valuable advice and comment during the research process. And he really had a hard work to help me finish this thesis. Thank you for your guidance and the sharing of your knowledge! Furthermore, I would like to thank my second supervisor Dr. Christoph Dörrenbächer for his critical remarks and comment.

Special thanks to

My mother and father, mother in law and father in law (†), brothers and sisters for their support, interest and understanding during my studies. Especially for Diane, Frank and Micha for everything they did to me.

Om Ben and Tante Selvy, Fonda and Johan for their helps during in Netherlands

Prof. Dr. Paulus Kindangen, and Drs. Tommy Parengkuan, MS for their recommendation Patrick, Opi and Nara for their helps when I moved from VHL to their home.

Roy, Frederick and Bima for our friendship in Groningen.

Kadek, Dendi and mas Harry for their advice and comment for my thesis.

Nila and Alex for providing room in their home when I have to defended my thesis

Depkominfo for the scholarship

Minahasa Raya Foundation for their support Mr. Willie Smits for his support.

Joy Elly Tulung August

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3 | M a s t e r T h e s i s – J o y E l l y T u l u n g ABSTRACT

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4 | M a s t e r T h e s i s – J o y E l l y T u l u n g Table of Contents

PREFACE . . . 2

ABSTRACT . . . 3

CHAPTER I: INTRODUCTION . . . 6

Profile: History Business in Indonesia . . . 8

The Dutch Era . . . 9

Soekarno Era . . . 9

Soeharto Era . . . 11

Reforms Era . . . 12

Problem Statement . . . . . . 14

Main Research Question . . . 15

Sub-questions and argumentation why to use these questions . . . 15

CHAPTER II: INDONESIA STORY AND HYPOTHESES . . . 19

Business Elite in Indonesia . . . 19

The Story of Domination Chinese ethnic on business in Indonesia. . . 22

The existence of Chinese ethnic . . . . . . 27

Military in Indonesia. . . 28

Foreigner on TMT. . . 32

The Age Of TMT. . . . . . 32

Educational Level on TMT. . . 33

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CHAPTER III: METHODOLOGY . . . 37

Independent Variable . . . 38

Dependent Variable . . . . 40

The conceptual model related by literature review . . . 41

CHAPTER IV: RESULT . . . 42

Data Descriptives: The Presence of Chinese Ethnics in TMTs. . . 42

Military on TMTs. . . 43

Foreigner in the TMTs. . . 44

Age in TMTs. . . 44

Educational Level of top management team . . . 45

Women in TMTs. . . 45

Regression Analysis . . . 46

CHAPTER V: CONCLUSSION . . . 48

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6 | M a s t e r T h e s i s – J o y E l l y T u l u n g CHAPTER I INTRODUCTION

Several studies attempt to relate Top Management Team composition to company performance, and the results are varied. Ever since the publication of the seminal work of upper echelon theory (Hambrick & Mason, 1984), interest on the study of top management team (TMT) demographic characteristics and their effect on various organizational outcomes has escalated. The upper echelon theory posits that observable characteristics of TMTs are the proxy measures of psychological factors that influence strategic choice. Various studies demonstrate that organizations are the reflection of top managers. According Finkelstein and Hambrick (1996) have noted that from 1984 to 1996, over two hundred studies about upper echelon theory were published. Carpenter et al (2004) also revisited the composition TMT in terms of diversity from Upper echelon theory due to the internal and external management tasks.

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(2005) conducted research of 80 of the largest TNC’s, and he found that 60/80 or 75% of these companies had at least one foreigner in board members.

Some articles also investigated TMTs composition in Europe companies, Glunk et al (2001) studied and explored differences and similarities between top managers and top management in Great Britain, The Netherlands and Denmark. Furthermore, Heijltjes et al (2003) studied the extend of national diversity of TMTs in two countries in Europe, The Netherlands and Sweden. Hendriks (2004) conduct research in TMTs diversity and firm performance in Dutch and Belgian small and medium sized IT firms. And then van Veen and Marsman ( 2008) explain nationality diversity in 15 European countries.

And just a few article from the rest of world, I only found the article from Ping (2007) who made empirical study of the 2001-2002 data from 356 Chinese companies listed in the Shanghai and Shenzhen stock exchange indicates that within the social context of China the characteristics of a firm’s top management team have a different impact on firm performance from those of other countries. And article from Julian et al (2003) studied the relationship between top management team composition, group processes, and the effects of those processes on goal attainment were examined for International Joint Venture teams in Thailand.

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background) has an effect to the company performance. But in apart, the presence of Chinese ethnics has a negative influence to the company value and the other variables has not effect to the company value.

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9 | M a s t e r T h e s i s – J o y E l l y T u l u n g Profile: History Business in Indonesia

Indonesia is a large country, it is the world's largest archipelagic state. And also with a population approximately of 222 million people in 2006, it is the world’s fourth most populous country. With this big population, Indonesia has a diversity in ethnics, language and region. And Javanese is the largest ethnic group in Indonesia. With the large population and the big natural resources, Indonesia surely has many companies in every sector, also amount FDI companies came to invest their capital.

So many issues about business in Indonesia to investigate such as, top management team composition, the ownership, the relation with government, involvement of military in business, diversity ethnic in top management team. And I try to formulate all this issue in my study.

History of business in Indonesia is divided by four period, The Dutch Era, Soekarno Era, Soeharto Era and lastly Reforms era. I will explain one by one.

1. The Dutch Era

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The Dutch era was over when Japanese came to defeat them in World War II on 1942, and after Japanese was loss in World War II from alliance force, Indonesia proclaimed its independence.

2. Soekarno Era – Old order (1945 – 1966)

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“Guided Economy” (Ekonomi Terpimpin) based on Soekarno advocated Indonesian Socialism (Sosialisme à la Indonesia). In this era, we cannot found the Multinational corporation (MNC). Although, Indonesia achieved independence in 1945; however, in practice, there was not much room to implement any sort of economic development policy, let alone economic reforms, in the following 20 years. Soekarno era was over when he gave authority to Let. General Soeharto, in the historical day as known “Surat Perintah 11 Maret” (Order of March the Eleventh) on 11 March 1966 to restore order to the chaotic situation during the Indonesian Killing 1965-1966.

3. Soeharto Era - New Order (1966 – 1998)

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In this era, Soeharto gave power for the military to be involved in Business to gain a full support from the military for his regime additionally and Soeharto family, such as his children have many companies and control all sector business in Indonesia, for example in the automotive and transportation sector Tommy Soeharto who has a hobbies in automotive at least had a 15 automotive companies, Sigit had several race circuit, Bambang had six transport companies, and Tutut had one taxi company and a lot of highway project. Also in the financial sector, the children of Soeharto had many companies, such as in BCA together with Anthony Salim (son of Soedono Salim) they were majority shareholder and the other sectors such as mining, gas and petroleum, media, telecommunication, property, media, etc. Soeharto cronies such as Bob Hasan and Soedono Salim, etc, a dominated in all business sectors in Indonesia. So in this era he created many conglomerates. The army supported his power and profited from the situation. Furthermore, Soeharto opened Indonesia by facilitating FDI as result Multinational Corporation was growing in every sector in this era. The monetary crises in 1998 was the beginning of the fallen down Soeharto from his power. It began when the crises came to Indonesia from Thailand and South Korea, but actually this just like ice-berg theory, the crony of Soeharto and his family had a lot debt and when the crises came, the debt was growing and the government suffered.

4. Reforms Era (1998 – present)

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business owners, local politicians and even entertainers. The business elite in this era has a little changed, because most of the crony of Soeharto had gone bankrupt and went to jail (for example Bob Hasan). Others, as Sadono Salim had move to Singapore, but it just for a while, because now with a new generation from their family back again to built their group business kingdom and get new relation with a new government, and now their wealth is increasing more than before. Also a new power in business has rise up for example Arifin Panigoro with Medco he had a closely relationship with Megawati, and in present Abdurizal Bakrie (Indonesian richest 2007 according Forbes Asia) with a Bakrie Group, he is also a Indonesian Coordinator Minister of People’s Welfare he is close with Jusuf Kalla (Indonesia vice president) and also have a position in Golkar (party of Jusuf Kalla). This situation shows every transfer of power in Indonesian government also have an effect on Indonesia business elite. This is indicates business elite in Indonesia has a closely relationship with politics elite.

Business Indonesia situation post-crises economic

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Indonesia and the Republic of Korea are still struggling to overcome the crisis, even though these countries have received the IMF’s bailout package and reform their economic strategy and plan dramatically (Tjiptoherijanto, 1997). Most studies of the Asian financial crises in 1997 conclude that Indonesia suffered more than Thailand and Korea.

Eleven years have passed since then, but the competition of economic power in Indonesia has not changed much, Salim Group has great comeback, with hand of Anthony Salim, the successor from his father Soedono Salim. After to be deep in debt during the crises economic, in September 2007 the company had been the biggest company in Indonesia has acquisition oil palm company London Sumatera Plantation worth Rp. 8,4 trillion*. Expansion has been “daily fare” for Indonesian tycoons of late. Acquisitions are no longer big news. This means that their strategy to grow and develop is being carried out. This is a period exactly the opposite of what happened when the economic crisis hit Indonesia in July 1997, when business people adopted a defensive strategy. They eliminated any unprofitable side businesses. The downfall of a number of major business groups during the crisis is buried in the past such as Texmaco Group and Djajanti Group.

With a four periods in Indonesia we can see, the different and similar condition, time was changed and will be change in the future, and politics elite always changed by time, so business elite have to a good relation with a politics elite in Indonesia.

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15 | M a s t e r T h e s i s – J o y E l l y T u l u n g Problem Statement

This research examines the link between the background characteristics of Top Management Teams (TMT) composition and company performance, Indonesia business elite is very specific historical background and compare with the USA is very difference way how business elite structure so might be effect a performance from the company. As the top management team are the strategic decision makers, they lead the company to different directions according to their decisions and they are responsible partners for the gains and losses of the companies in international business environment. Furthermore, the relation between the top management team members composition and the companies outcomes is an important issues. A number of researchers from international management area investigate about top management team composition such as diversity in nationality, age, gender, level but I am not aware of any article investigating about top management team composition of Chinese ethnic and military background. And Indonesia have a different terms in business elite compare with the prior research.

Main Research Question

Top management team composition is a big issue in international business and management research, but is limited academic literature investigate about this is in Southeast Asian. These studies have mostly been conduct in US and Europe. So the result for these studies reflecting diversity and cultural of the underlying US and Europe population.

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greater power and need to disclose less information than boards in the United States. However, they do not address these issues for Southeast Asian.

Based on the differences between these countries and the management practices, the result of previous studies on diversity and the characteristic may not fit with the result of this study of companies in Southeast Asian (Indonesia).

The goal of this study is to find an answer the main research question:

“ how does composition on top management affect the company performance of companies in Indonesia “

Sub-questions and argumentation why to use these questions

Following the main research question, the subquestion will be introduced briefly in this part. Indonesia have a lot of companies, but in my thesis I will divide with two type, state-owned companies (SOC) and private companies. Every sector business in Indonesia have SOC and the same thing in private companies they operated in every sector in business at Indonesia, and cannot be unavoidable they must be compete each other. And the business elite both of them is really different, SOC has been appointed by a government and the privately companies appointed by the owner of the company.

And the following sub question has been derived as:

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Indonesia with a diversity ethnic surely have a diversity composition in top management team, people of different ethnic backgrounds might bring different values and perspectives to the strategy-making process (Jarzabkowski & Searle, 2003). According to Wertheim which was quoted by Mackie (2005), the Chinese ethnic class division against the native society has a vertical nature which is defined as a primordial nature as the response that the Chinese ethnic is considered as the minority society. The competition between the Chinese economic behavior (especially as a businessman or entrepreneur) with the native society usually becomes the reason of the open and close conflict against the Chinese ethnic. The network system amongst the Chinese ethnic in Indonesia psychologically strengthens its members through business relationship etc. This networking also functions as the tolerance mediator between Chinese ethnic with the society, especially in business relationship

The following sub question has been derived as:

How does existence of Chinese ethnic in top management team affect the company performance in companies operated in Indonesia.

Military involvement in Indonesian business has a long story, but I did not found any article investigate military background in top management team composition. It might be has a influence in company performance or not. So the following sub question is:

How does top management team military background affect the company performance in companies operated in Indonesia.

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diversity is supposed to lead to better company performance, so increased diversity is an important requirement for quality of strategic decision making.

The following sub question has been derived as:

How does the presence of foreigner in top management team affect the company performance in companies operated in Indonesia.

At the demographic level, team diversity refers to variables, such as age that is apparent measures of team difference. This indicators of diversity are proxy measures for deeper cognitive, informational and value differences, since a young manager might be expected to have different information, experiences and perspectives to bring to a strategic issue than an older managers. Pegels and Yang (2000:697) state ‘that older managers tend to be risk averse (Vroom and Pahl, 1971) whereas younger managers tend to pursue more risky, innovative growth strategies

The following sub question is:

How does top management team age diversity affect the company performance in companies operated in Indonesia.

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How does top management team level of education diversity affect the company performance in companies operated in Indonesia

Glunk et al (2001) found that the gender distribution to be highly comparable among the three countries: female executives are clearly under-represented in the top 30 companies of Great Britain, Denmark and The Netherlands. Furthermore, according to Jarzabkowski & Searle (2001) they argue that over time the diversity indicated by these measures tends to break down. That is, the longer that a team is together, the more that members gain familiarity with each other and the less that these demographic measures indicate true diversity. For example, in the early stages of team formation, differences of gender may be seen as remarkable or significant to the way a team member behaves. Over time, those features of the person become familiar and cease to be remarkable. This follows question is:

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20 | M a s t e r T h e s i s – J o y E l l y T u l u n g CHAPTER II:

INDONESIA STORY AND HYPOTHESES Business Elite in Indonesia

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Figure 1. Business Elite in Soeharto Era (source Majalah Tempo)

PM = Prasetya Mulia foundation (Liem Sioe Liong, William Soeryadjaya, Prajogo Pangestu, etc) Figure 2. shows the business elite divided into various power, such as Susilo Bambang Yudhoyono (Indonesia President), Jusuf Kalla (Indonesia vice President), Legislature and Campaign team of presidential candidates. So this is not surprised when the board of commissioner in Indonesia companies was the campaign team of president, especially in state-owned companies, for example one year after won in election of presidential, government appointed general secretary of their campaign team to be a commissioner in one of the state-owned companies. So, there are a close link between business elite and the presidency and the part of companies in Indonesia has a close related with elite politics.

Business Elite

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Figure 2. Business Elite at present (Source Majalah Tempo)

SOC and privately companies has a different kind of aspect of business elite, so many differences, such as networks, recruitment and rewards. The networks in business elite is more depend on the relation with the government, to extend beyond business into government and other realms within society, especially from SOC, where business elite and politics elite are closely related. The recruitment in SOC is extremely dependent on government.

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23 | M a s t e r T h e s i s – J o y E l l y T u l u n g Insert Table 1

Table 1 shows the commissioner in SOC has from member of president campaign team of the present government, and will be increasingly in the future because government still have a long list from many things such as member of campaign team, family, politics relation, friends and military. On the other hand in private companies they recruit the person in board more based on professionalism and have a capacity in their fields or the people from inside who have a good carrier from below position, although they also appointed many family on board but most of them have a good educational level and start from below position, so they have a good experience in business. For example, in all Ciputra business, he appointed a professional people besides his children in the board (before it he sent them to study in abroad), the same thing happen in Salim group business, Soedono Salim entrust the business to his children and leave them to work together with a professional people.

H1: “There is a positive relation between owner of companies on top management team with companies performance”

The Story of Domination Chinese ethnic on business in Indonesia

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Domination of Chinese in Indonesia economy and business began before Soeharto cam into power in Indonesia, several years before be a president when he was a commander in Diponegoro division located in Central Java, he had developed a relationship with two Chinese: Soedono Salim alias Liem Sie Liong (who become a leader of Salim Group) and Mohammad Bob Hasan, both of them being a best friend of Soeharto and namely Soeharto cronies in the future (Elson, 2001). After that and until present an ethnic Chinese family business group grow so fast in Indonesia and surpass the other ethnics groups

The Chinese ethnic life in Indonesia is definitely interesting to observe. Mainly because it is a sensitive subject due to racial tension, and secondly, because of its background history and their view of life along with their experiences living in this country cannot merely be generalized.

Fujitsu Research in Tokyo (Naisbitt, 1997:19-20) which observed lists of companies in 6 (six) key countries in Asia recorded the description on how those companies are majority dominated by the Chinese ethnic abroad, for instance 81% in Thailand, 81% in Singapore, 73% in Indonesia and so on.

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then commonly related to collusion, corruption and nepotism were also done by the middle and upper class of the Chinese businessmen.

However, the economic improvement as well as life establishment engaged and proudly promised by the New Order era was like an ivory tower with a weak foundation; therefore there was the collapse of Soeharto’s regime and an ‘aching’ establishment of life caused by the monetary crisis. The lower level ‘moves’ due their discontent against the situation and condition of their social life, and the anti establishment life attitude, which one of it was provoked in riots in May 1998. The riots took form in destroying stores and business center owned by the Chinese ethnic. It stimulated the collapse of Soeharto’s government. The riots of May 1998 also influenced the anti Chinese ethnic attitude especially the Chinese who own businesses. A lot of traumatic Chinese people caused by the riots of May 1998 moved abroad and some of them put their investments abroad. A lot of Chinese businesses in big cities get a break for a moment and started to rise after there was a guarantee of safety from the former president Mr. Habibie.

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business mainly on foreign party and Chinese entrepreneur. The Chinese entrepreneurs were still waiting for a concrete steps done by the Gus Dur’s government in restoring the national economic and business condition; however, the Chinese entrepreneur still feel ‘safe’ to run their businesses and temporary stay in Indonesia. Thus, the businesses run by the Chinese at those times tended to be the most advantageous business for them especially the downstream business instead of high risk or speculative businesses such as.

The Chinese ethnic in Indonesia becomes one of the descendants of the China abroad society who lives and stay abroad. The Chinese ethnic abroad network since the economy activities in 1990’s until now has dominated the economic activities in Asia, including Indonesia. Those stronger overseas networks also dominate the way and behavior of the Chinese ethnic in Indonesia in dealing with the globalization. The Chinese ethnic in Indonesia are more ready in facing the globalization. As reported by the Chinese magazine Forbes Zibenjia in 1994 which analyzed hundreds of big companies and 10 (ten) Asian market exchange i.e. Taipei, Seoul, Shanghai, Hongkong, Shenzhen, Bangkok, Kuala Lumpur, Jakarta, Singapore and Manila: “Their combined assets came to $ 1.14 billion, or 89 percent of total market capitalization of the top thousand companies, 517 had an ethnic Chinese as the single largest stockholder. Thus, ethnic Chinese controlled $ 541 billion, some 42 percent of the total in these ten markets is quite a bit more than the $200 billion to $300 billion cited in other estimates”. (Naisbitt, 1997:19)

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becomes one of the characteristics of the network they build. From small businesses to big ones owned by the Chinese ethnic in Indonesia, they are mainly run as a family business, such as Salim Group, Khong Guan, PT “Cap Orang Tua” traditional ‘jamu’ company “Jago”, traditional ‘jamu’ company “Air Mancur”, and many others. One of the portraits of a Chinese ethnic conglomerate was Liem Sioe Liong, according to Dieleman (2007) she stated in her book several authors and media have estimated the turnovers of the Salim Group (own by Liem Sioe Liong) in its golden age before the crisis.

H2: “There is a positive relation between the presence of Chinese ethnics in top management team in companies operated in Indonesia to its company performance”

Military in Indonesia

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was 47%, secretary general was 73,6%, inspector general was 70,9%, secretary of minister and vice minister was 84%. In the level of regional heads, governor was 70,3% and regent was 56,6%. In the foreign representative, ambassador was 44,4% and consul was 34,3%. According to Harold Crouch’s data, in 1968, the number of Governor who came from the military was 17 Governors (71%). After the general election in 1971, from the 26 provinces, there were only 4 (15%) Governors who came from the civilian (Najib, 2003). Whereas in the level of regency, in 1969, the number of Regent and Major in all over Indonesia was 271. After the 1971 general election, the number reached two third Up to 1998, around 4000 military members took civilian position(Crouch, 1999). In 1966, from the 27 governmental cabinet members, 44% of them were ABRI member, 6 persons from the Army and 6 other ministers were from the chief commander of other forces. In 1968, composition of ABRI member changed or decreased to be 23 persons (Diamond and Plattner, 2001).

Penetration and power of the military on bureaucracy in the period of New Order can also be seen from MacDougall’s study in 1982, which described that percentage of military officer is more dominant than civilian in the board of highest central bureaucracy by anatomizing the highest personnel in all over ministries existing, started from Minister of Coordination to Director General. He also found a fact that in strategic ministries, number of military was very dominant compared with the civilian.

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now. Before New Order was started, in 1956-1957, General A. H. Nasution (Chief of Indonesian Army Force) declared ABRI’s dual function, which was received by President Soekarno. In his reflection on guerilla warfare written in the early 1950s, General A. H. Nasution expressed the view that “the guerilla cannot just emphasize fighting but also stress political-psychological and socio-economic aspects… A military matters alone because he will fail if he limits himself or is limited to military matters alone because he will be unable to carry out political, propaganda and economic warfare which are absolutely essential for victory” (Crouch, 1975).

Whereas ABRI’s involvement in the State-Owned Companies was started when rationalization of Dutch companies in 1957-1958. Those SOC, according to Harold Crouch, ABRI observer from Australia, immediately became the military’s ‘cows’. In Crouch’s opinion, the most important fund sources for the Army, in the early term of New Order, were Pertamina, Bulog, and PT Berdikari. The military involvement in Pertamina started in 1957, when the Chief Army, Major General A.H. Nasution, told his deputy, Colonel Ibnu Sutowo, to take over a field in Sumatera, which at that time was named as Permina. After 1966, Permina, which was dominated by the Army, changed its name to be Pertamina.

In January 1957, Soeharto constructed four-territorial development foundation, which aim was to conduct various businesses in the field of economy and finance to provide possibility of helping farmers and villagers. (Ramadhan, 1988).

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development as a rational choice because New Order was developed over economic bankruptcy. New Order government believed that economic development cannot be success without control mechanism from the military. Important position in bureaucracy and easy access in economy supported capitalist of military bureaucrats to sell services from their positions to the private, mainly to China.

Military involvement in business can be categorized in two main typology: institution, and non-institution (Samego, et.all, 1999). Institutional or formal business (Table 2) is a business officially relates to military institution. Business managed under foundation and cooperation includes institutional business category. Because both foundation and cooperation were established following the Army’s territorial commands and the dividing of defense territory of the Air Force and the Marine. This institutional business that shall be released to the Government by the Indonesian Military (TNI).

Insert Table 2 Insert Table 3

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H3: “There is positive relation between the presence of Military in top management team in companies operated in Indonesia to company performance”

Foreigner on TMT

Lublin (2005) argues that corporate boards of MNCs are going global, particularly in Europe where 90 per cent of Europe’s largest companies by market capitalization have at least one director from outside the home country. By contrast, only 35 per cent of the largest USA companies have a foreign board member. Furthermore, Van Veen and Marsman (2008) argues that nationality diversity is an important requirement for quality of strategic decision. More foreigner in TMTs in companies has a better performance than just a few foreigner. I would like to use a literature from foreigner in TMTs in Indonesian companies but I did not find. With the good quality in experience and education the presence of foreigner in TMTs in Indonesian companies might be affect the company performance

H4: “There is a positive relation between the presence of Foreigner in top management team members in companies operated in Indonesia and company performance”

The Age Of TMT

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because their life experiences are similar. Furthermore, Wiersema & Bantel, (1992) argue that younger managers are associated with greater strategic change.

The older a person is, the wiser he is. If we observe from the age period related to his ability to perform his best duty, middle grown-up period is the period when a person has achieved and maintain his contentment on his career, they tend to focus on their jobs instead of move around from one company to another. It is described that a person’s age can influence his duty performance in a company as well as influences the company’s value. Besides, older employees show a lot more loyalty to the company than the younger ones. (Dessler 1997).

H5: “There is positive relationship between the average age of top management team members in companies operated in Indonesia to company performance”

Educational Level on TMT

Educational level of the board members affect the knowledge they have. Though it is not an obligation for someone is going to enter into the world of business to have a business formal education, however, it is better for the company if the board members own a business and economy formal education background. Having knowledge of the existing business and economy will enable the board members to have a better ability in running the business and in decision making rather than if they don’t have any of such background. Finally, it will influence the company’s value. Bray and Howard and Golan as quoted by Santrock (1995) stated that study in the university helps someone in improving his career where a well educated person will achieve a higher and faster career.

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reveals that success does not only defined by knowledge and technical skills (hard skill), but the skills to manage himself and other person (soft skill) too. This research reveals that a success is only determined by 20% of hard skill and the rest 80% is by soft skill. The determination of the term hard skill is skill that can produce something visible and immediate. Unlike hard skill, soft skill has the quality of invisible long term. Soft skill consists of interaction with someone else’s life. The examples of soft skill among others are: the ability to adapt, communicate, leadership, decision making, problem solver, conflict resolution.

H6: “There is the positive relationship between the Educational level of top management team members in companies operated in Indonesia to company performance”

Women In Indonesia

Nowadays, the condition of Indonesian woman is different than before where they also forces to actively participate in National Development. Indonesian woman including ones who has already married, as a human resource, are attempted to get the opportunity to fulfill their potential optimally. Among others are military, modern business and computer, notary, journalism, catering, public relations business, marketing research, as well as art business and theatre. Assigning as the highest leader in a university or a faculty dean is now considered as something usual for a woman. Also notice woman participation in politics, either in legislative or executive board.

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woman enhancement of the XX century recently, a transition is needed. On this transition era, which is from the Dutch colonial, a lot of woman devoted themselves to do social activities through an organization either in central or local government. The various kinds of region, such as religion, culture, level of education, standard of living, makes the effort to enhance woman is modified to the local condition. The pioneer women realized the importance of taking a good notice on the continuity of life and the culture and they fight for it. The women movement is the strongest motivation for every changes in woman‘s life covering many fields.

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tends to avoid challenges and is more precise than man. This quality encourages woman not to be more careful in making decisions. That is why with woman in director level is said to be able to help the company in making the right and lower risk decision. Charness and Gneezy (2004) in their research by taking university students majoring in decision making class finds out that in monetary investment, woman invests smaller amount than man. They said that different to man, woman does not quite like any risk, that is why woman has a lower percentage on some position than man. However, research by Carter et al. (2003) finds out that if a company has two or more women in its board member will have a higher company value (proxies by Tobin’s Q ratio) than one with fewer woman on its board member.

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36 | M a s t e r T h e s i s – J o y E l l y T u l u n g CHAPTER III:

METHODOLOGY

In my theses, I will use deductive research method as the methodological approach. A deductive research method entails the development of a conceptual and theoretical structure prior to its testing through empirical observation (Gill and Johnson, 2002). The sample companies consist of State owned and private companies operated in Indonesia. The data collected by secondary data, from the companies annual report, provided in companies website. I have chose 100 companies listed in Indeks Kompas100 and also add 17 State owned companies besides it, such as Pertamina, PLN etc

In this paper, every hypotheses try to analyze the effect of TMT diversity – Independent variable – on company performance, the dependent variable. The relationship is hypothesized directly between the heterogeneity of top management team (TMT) diversity and the return on asset (ROA) value of companies in each countries.

In prior research, the top management team was defined including the Chairman, Vice Chairman, Chief Executive Officer, Chief Operating Officer, President, Senior Vice President, and Executive Vice President (Tihany et al, 2000, Hambrick and Mason 1984). In my study, top manager are Board of Commissioner (Commissioner, Independent Commissioner, etc) and Board of Director (President Director, Vice President Director, Director, etc) in Indonesia.

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management team and military background of top management team. To answer the sub-question these variable will be measured as follows:

Independent Variable

- Stated owned companies vs privately companies

the difference performance between SOC and privately companies

- Chinese ethnics vs non Chinese of top management team (X1), this information provide in each TMT members biography and curriculum vitae, and ethnic variable can be describe which the family name, name identity and place of birth.

- Military background of top management team (X2), this information provide in each TMT members biography and curriculum vitae

- Foreigner of top management team (X3), this information provide in each TMT members biography and curriculum vitae, and nationality variable can be describe which an individual citizenship.

- Age of top management team (X4), to see the impact of age in TMT members to company performance, the averages of TMT will be measure by the year of birth, I will see the biography provide in company website

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- Top management team gender (X6), can be describe by the condition of being male or female, and the data provide by the biography and curriculum vitae each manager.

After the data collection process, the quality data will be control and necessary statistical test will applied on the data using SPSS.

Depended variable (Y)

Company performance, to find the impact from TMT diversity to company financial performance, I will investigate the data from 2006 annual report. In my study financial performance of the sample companies will measure by return of asset (ROA)

ROA = Net Income.

Total asset

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39 | M a s t e r T h e s i s – J o y E l l y T u l u n g The conceptual model

Top Management Team Composition

Y = a+ b X1 Y = a+ b X2 Y = a+ b X3 Y = a+ b X4 Y = a+ b X5 Y = a+ b X6 Y = a+ b X7

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40 | M a s t e r T h e s i s – J o y E l l y T u l u n g The conceptual model related by literature review

I follow Maclean et al (2005 : 4) who studied the relationship between business elites and corporate governance in France and the UK. They developed a conceptual model with a pyramid, and underlying ideologies, assumption and values on which rules and practice draw are positioned closer to the base of the pyramid, in the middle ground were business system, structure and relationship and the top were rules, relegation and practices.

Van Veen and Elbertsen (2008) in their article their studied the relationship between governance regime and nationality diversity in corporate boards in Germany, UK and the Netherland. Their concentrate on structural features of governance regimes that might affect the accessibility of boards for foreigners. And then specifically look at corporate governance codes, ownership differences, the legal framework and some business elite traditions.

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41 | M a s t e r T h e s i s – J o y E l l y T u l u n g RESULT

Data Descriptives

The Presence of Chinese Ethnics in TMTs

The result part will start with the presence of Chinese ethnics in the board, the figure 3 shows the data from the frequencies statistic. And the result is 21.9 % of the board from Chinese ethnicity, 19.1 % Javanese and the other and unknown (missing data) are 21 % and 38 %. Furthermore, figure 4 and table 3. Shows the number of ethnic Chinese in the board is 275 executives. It means that the largest group of the members of TMTs in the sample companies are Chinese and following that are Javanese (244), Sundanese (75), Other from Sumatera Island (54), Batak (42) and Minahasa (31) and the other ethnics below from 15.

Insert Figure 3

Insert Table 4

The data shows the domination of Chinese Ethnic in TMTs on companies in Indonesia, this is because the ownership of the companies from the Chinese. In privately companies 28 % (table 4) of TMTs is Chinese its meaning very dominant compare with the others ethnics, in contrary in SOC Chinese ethnics just 1 % (Table 5). Table 6 shows the companies from Chinese Family Group give an opportunity to Chinese ethnic to have a career in their companies but these companies are still open to other ethnics, but in contrast in table 7 shows the percentage is dominant from Javanese 37.9 % and Sundanese 12.1 % and the opportunity from Chinese Ethnics very low, just 1%.

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Insert Table 7

Insert Table 8

Military on TMTs

The second part is existence of Military on TMTs, and the result according the figure 4. Just a few from total of the board has a military background. The figure 4 shows, just 2,94 % (37) is military and 97,06 % (1223) does not have a military background. Its meaning the military in TMTs just a few and might be is not have an influence on companies performance. This is indicate the presence of Military in TMTs just for security or something else. Table 8 and 9 shows both of Private companies and SOC the presence of Military in TMTs are very low (2.6% and 4.1%). The result is contrary with the past (table 2), when military have a power in a lot of companies in Indonesia especially in SOC, for example BNI, in the past military had dominated in board of this bank and in present we cannot find military in the board. This is probably because downfall of Soeharto, the military power is reduce increasingly. Despite it, Pertamina, the most famous SOC from Indonesia keep retain the tradition from the past, till now military has a representative in top management team.

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43 | M a s t e r T h e s i s – J o y E l l y T u l u n g Foreigner in the TMTs

Foreigner on TMTs from the sample data can be look in figure 4. That shows 11,83 % (149) is foreigner and 88,17 % (1111) is domestic executives. And table 10 shows executives from India (18), UK (17) and Singapore (15) is dominant from the 149 foreigner. Just a slightly different the foreigner in TMTs in Indonesia if we compare with foreigner in TMTs in Europe, with 14,9% (Van Veen and Marsman, 2008). And table 11 shows the percentage of foreigner in TMTs on privates companies is 14.9% is same with the percentage in Europe, in contrast table 12 shows the percentage of foreigner in TMTs just 1.4 %. Its meaning the recruitment of TMTs in Indonesia companies is strongly influence by national government regime, especially in SOC, the foreigner in TMT almost nothing.

Insert Figure 5 Insert Table 11 Insert Table 12 Insert Table 13

Age in TMTs

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Insert Table 15

Educational Level of top management team

In the level of education (table. 15), a bachelor level is more large than a master level with 39,9 % compare 34,1 %, and a few is Phd level (7%). And table 16 shows, studied in home country still have a large number with 478 executives, otherwise the executives studied in abroad have a more number with 553 executives, and US with 285 executives was the favorite place for them to take a degree.

Insert Table 16 Insert Table 17

Women in TMTs

Figure 6. shows the percentage of women in boards just a few percentage with 8,56 % compare with a man with 91,44 %, this is indicate the presence a women in top management team in Indonesian companies just a little number. Its meaning the women in Indonesia still have a long way to be a leader in firms. And just a few from the women in Indonesia success to be an executive on board.

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45 | M a s t e r T h e s i s – J o y E l l y T u l u n g Regression Analysis

Owner the company has a negative regression coefficient of -0,025 with a significant level of 0,628. Therefore the hypothesis H1 that There is a positive relation between owner of companies on top management team with companies performance is rejected. So there is no relationship between ownership of the companies and the company performance.

In hypothesis H2, the finding shows the Chinese ethnics has a positive regression of 0,075 with a significant level of 0,157. Therefore the second hypothesis is rejected. This is indicates that there is insignificant relation the presence of Chinese ethnics in top management team in companies operated on Indonesia to its company performance.

Military has a positive regression coefficient of 0,104 with a significant level of 0,035. Therefore the hypothesis H3 that there is positive relation between the presence of military in top management team in companies operated in Indonesia to company performance is not rejected. This is show that there is a significant relation between the presence of military in top management team on companies operated in Indonesia.

The Foreigner variable is excluded because it had a zero correlation so is irrelevant, so the hypothesis H4 is rejected also.

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The educational level has a negative regression coefficient -0,011 with a significant level of 0,817. Therefore the hypothesis H6 that there is the positive relationship between the Educational level of top management team members in companies operated in Indonesia to company performance is rejected. So there is a negative relationship between education level of the top management team on companies operated in Indonesia.

Women has a positive regression coefficient 0,080 with a significant level of 0,092. Therefore the hypothesis H7 that there is the positive relationship between the presence of women in top management team in companies operated in Indonesia to companies performance is rejected. So there is insignificant relationship between the presence of women in top management teams on companies operated in Indonesia.

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47 | M a s t e r T h e s i s – J o y E l l y T u l u n g CONCLUSION AND DISCUSSION

This study has been conducted to examine if the composition of top management team has a significant effect on company performance in Indonesia companies such as state-owned companies and privately companies. The prior research mostly from US and Europe researcher so it might be different within the Indonesian context.

In my thesis I investigated 117 Indonesian companies, i.e. 100 companies listed in Jakarta Stock Exchange, namely 100 Index Kompas, and I added 17 state-owned companies to complete the other state-owned companies in 100 Index Kompas.

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level of education. The presence of women has a negative impact on the company performance in Indonesia companies. Although the traditional attitudes are slowly changing, especially among the younger generation, where Indonesian women gain more education and economic pressures make their income important for the family to maintain a decent standard of living but the presence of women in top management team at the moment does not effect in company performance.

Suprisingly the presence of military on TMT member has a positive relation with a company performance, this indicates that the military in Indonesia still have a power to influence companies performance. Overall, the result indicated the upper echelons theory is not influence in Indonesia companies at the moment.

My thesis has a several limitation, such as (a) does not separate the financial sector with the non financial sector, it is might be the main reason why most of the variables were not significant; (b) the data is very limited, so many missing data in the statistics. This is because, the data from the companies annual report and the companies website is very limited. This is probably the companies does not want openly to the public about the inside of the companies. Discussion

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management team board is based on the personal quality. Therefore, the qualifications of TMT members themselves and the effectiveness with which TMT members interact are critical factors for achieving a positive organizational outcome is not valid on companies in Indonesia.

Although the power and the involvement of military has dramatically decreased compared to ten years ago the result of this research show us the military still have a power in Indonesian business. They still can give a company protection and affect the company performance. The relation between business and politics in Indonesia also give an impact to the top management team members, not only in SOC but also in private company, which need good relations with the political elite which offers protection, a market and resources for company operation.

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The quality of the dataset in my thesis is not so good, this is because too many missing data. This is because the limited resources from the data collection, incomplete annual report from most of the companies has impact of the completeness data.

Hopefully my thesis can give a contribution to the future research, particularly for the top management team composition and business elite in Indonesia. And it also motivated to me and might be the other researcher who care about Indonesia business environment to development this issue. For researchers outside Indonesia it creates a possibility to compare this situation with other countries and it can be a reference for their research. Also the data is available to make for another research.

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