“Corporate social responsibility policies and value creation: does corporate governance and profitability mediate that relationship?”

With a purpose to give a deep understanding relating to the manifestation of social re-sponsibilities practices among Indonesian companies, this paper reflects the relationship of corporate social responsibility (CSR), corporate profitability (CP), value creation (VC) and good corporate governance (GCG). Kinder, Lydenberg, and Domini’s (KLD) measurement approach is used in this study to measure the social responsibility practices, as this gives cross-border analysis of social responsibility. Corporate profitability captures return on assets, which is accounting-based measurement, whereas value creation explains the economic value added, which is shareholder-based measurement. Structural Equation Model (SEM) analysis is conducted for Indonesian listed companies, which appeared in Corporate Governance Perception Index (CGPI). The empirical result suggests that CSR serves as a tool in assisting shareholders value and performance. Accordingly, firms should incorporate CSR practices to enhance its strategic investment and sustain a strong relationship with its stakeholders. Subsequently, management should also take concern of having good corporate governance in order to improve company’s performance by supervising and monitoring of the company’s operation, ensure the fulfillment to the stakeholder’s interest. This paper presents fresh insights into applications of corporate social responsibility principles and corporate governance in Indonesian context that has not received systematic attention and consideration in the literature.


INTRODUCTION
In the traditional perspective, it is believed that business objective is to maximize the shareholder's wealth.However, as business grows, society comes up with different perspective on how organization should operate.In this case, companies should shift from the mindset of enriching only shareholders to focusing on all the stakeholders, including environmental sustainability and community welfare.It is also becoming more important for companies to fulfill the environmental expectation in order to gain its reputation, which further influences the firm's performance (Vargas, 2016).
Corporate social responsibility is considered to relate to corporate governance, as governance is positively associated with the environmental strength of a firm (Stuebs & Sun, 2010).Not only that, previous study describes that good corporate governance could not be able to increase reputation and performance of the company without also doing social responsibility practices (Chalise, 2014).Recent studies have also analyzed the relationship of CSR and corporate governance from LLC "СPС "Business Perspectives" Hryhorii Skovoroda lane, 10, Sumy, 40022, Ukraine BUSINESS PERSPECTIVES environmental performance perspective.The result shows a positive correlation on the study (Stuebs & Sun, 2010).This is because corporate governance highlights the framework to form an environment, which is transparent, accountable and trusted.It also refers to how companies are being directed and controlled to avoid disputes between agents and investors and ensure that funds managed by agents are used accordingly (Detthamrong, Chancharat, & Vithessonthi, 2017).
However, looking at the enforcement of CSR in Indonesia, this has been just a voluntary disclosure for many years.Meanwhile, starting from July 2007, Indonesian government has enforced a new regulation regarding CSR practices disclosure.Despite the large number of studies on CSR in the context of developed and moderately developed economies, whether or not CSR promote financial performance in the context of less developed and emerging economies has been relatively unexplored.Additionally, very few studies have examined the roles of corporate governance (CG) as intervening variable.Therefore, this study refocuses on the debates around CSR and financial performance.In this case, corporate governance (CG) is inserted/included to strengthen the relationship.Insights obtained from this study may contribute to both theories and real practices of CSR policies.It could be done to improve the CSR understanding and management literature, as well as answer questions by different individuals or corporates regarding CSR, CG and financial performance.H1: CSR policies have a positive impact on corporate profitability.

Good Corporate Governance and corporate's profitability
The practice of companies' corporate governance creates a system for managing, monitoring and overseeing the whole resources of the company cost-effectively and functionally (Jackling & Johl, 2009).Corporate governance is established to preserve the different interests of company's stakeholders that could give advantages for the company.A company with highly elevated Corporate Governance Perception Index (CGPI) indicates that it is managed with lucidity, responsibility, accountability, equity and independency.Consequently, the impact can be seen on the results of good corporate performance, such as ROE, ROA and EPS (Gompers et al., 2003).Some previous studies using similar governance index discovered that companies with more powerful stakeholder rights are likely to produce higher profits.Sheikh et al. (2013) also discovered a positive association between board size and company performance.
H2: GCG has a positive impact on corporate profitability.(Chalise, 2014).Recent studies have also analyzed the relationship between CSR and corporate governance from environmental performance perspective.In this case, the documentation of CSR performance of a firm has given benefits to support the corporate governance improvement effort of a company.
H3: CSR policies have a positive impact on Good Corporate Governance.

Corporate profitability and value creation
In the recent years, the influence of profitability or performance on firm value has gained much attention in many studies.In the competitive environment, companies are trying their best to sustain in the industry by optimizing their cost in order to gain more profit for their operations.Besides, management starts to concern about its investment plans to maximize shareholder's wealth and firm value (Chen, 2011).
Understanding the relationship between profitability and value creation is also important to financial decision making of the firm.Some researches have also proven the positive correlation between profitability and firm value (AlNajjar & Belkaoui, 1999; Crisóstomo et al., 2011; Osazuwa & Che-Ahmad, 2016).It was proven that as the firm profit got greater, more earnings would be distributable to shareholders.This is also in line with the agency theory about the management ability in managing assets in order to maximize profit, creating shareholder's trust to company's quality of management.Thus, the higher the financial performance, the higher the value of the company.
H4: CP has a positive impact on value creation.means that the company is working align with the corporate social responsibility.Besides, CSR creates value to the firm, as the firm could be able to differentiate them from the competitors and also to reduce its costs.As the firm is having adequate management, this creates also value for the business and society.This shows the positive correlation between the company investment in CSR and the value creation of the firm (Green & Peloza, 2011).Likewise, there was also found a positive relationship between CSR and share price among companies in the UK, especially those with an environmentally sensitive industry such as electricity, mining, and gas.Accordingly, the fifth hypothesis made for this research study is:

Corporate social responsibility and value creation
H5: CSR policies have a positive impact on value creation.From the population of 39 companies included in the Corporate Governance Perception Index (CGPI) in 2016 and 2017, there are 23 companies that were not included in this research, as the companies did not fulfilled the requirement of the research.It was those companies not consistently listed in CGPI and not publishing a complete annual report in the required period.Hence, there are 16 companies, which fulfil the criteria and this was the number of the companies observed.All samples that are used in the research are 32 reports derived from 16 companies multiplied by 2 years of observation.

Corporate social responsibility (CSR)
CSR policies are measured using Kinder, Lydenberg, and Domini's (KLD) method, chosen as a basis of CSR level.This measurement has been widely used in previous leading management journals (P.In each of the KLD measurement, there are strengths and concerns.The strengths are considered to be positive CSR policies implemented, while concerns are as negative CSR policies implemented.If a company has a strength or even a concern, this would be given a "1" or "-1" On the other hand, companies without any would be indicated with a "0".After scoring 5 qualitative areas, the total score of strength and concerns should be calculated in order to get net CSR.

Value creation
EVA spread is used as the mesurement of value creation.EVA is a performance measurement to calculate the residual income from subtraction of additional charge from net operating profit after tax (Steward, 2014), which take into account cost of capital and cost of equity.EVA aims to figure out the economic profit of a company.

Corporate profitability
Return on asset (ROA) is used as the measurement of profitability.This is calculated by dividing net income by average total assets.ROA is also known as the overall effectiveness of company's management in generating profits with its assets (

Good Corporate Governance
This research has been using GCG as the intervening variables.The GCG was measured using the measurement of Corporate Governance Perception Index (CGPI) that was published by IICG and SWA-Magazine.This then had a scale of 0-100 values.CGPI score with the predicate "very trusted" for companies with scores of 85-100, "trusted" for companies with scores 70-84, and "quite reliable" for companies with a score of 55-69.The higher the score a company can get, the the application of corporate governance is considered to be.Table 3 shows that all the factor loading values of each indicators are above 0.5.These value means that all indicators of CSR, CG, ROA and EVA, which were used to measure all the variables, have fulfilled the convergent validity test.From Table 4 the square root AVE shows a figure of 1.00 for all results.These are also bigger than the coefficient correlation of the other variables.

Composite reliability, Cronbach's alpha and collinearity
From the composite reliability test, all the variables have the value of 1.00, therefore composite reliability criteria are fulfilled.Not only that, result also has the Cronbach's alpha value of more than 0.6, which is 1.00 for all the variables.Thus, all the variables have been fulfilled the criteria of reliability.In order to fulfill the collinearity test, VIFs must be less than 3.3 or 10 in a more relaxed criterion (Kock, 2015).According to Table 5, all variables have passed the multicollinearity tests.

Descriptive analysis
Descriptive analysis is done through looking at the statistics of coefficients, which combined up as the data set, either in form of population as a whole or a sample as a part of the population.This explains the overview of the research data as a whole, which includes the total number of data used, minimum and maximum value, mean and standard deviation.Comparing the range to the CSR policies mean result in this research, the companies that are listed in Corporate Governance Perception Index (CGPI) and used in this research are presumably quite well.Besides, the profile GCG for its weighted average of 2016 and 2017 shows that GCG has one indicator with minimum and maximum value of 72.68 and 93.32.The samples in this research are those companies consistently listed as having a good corporate governance.It means that the companies show good performance and are considered as trusted companies, which lies within the range of 70-84.Besides, the mean value of the GCG score is 84.92, which, categorized as "most trusted companies", lies within 85-100.Thus, it indicates that companies begin to be concerned about their corporate governance.

Hypotheses test (direct, intervening and total effects)
The hypothesis test was done by using the T-test and re-sampling.In this research, the hypothesis test was divided into 3 parts: direct effect, mediation variable and the total effect of the variables.7 show that corporate social responsibility policies affect corporate governance with the coefficient value of 0.32 and p-value 0.02, and it also gives effect on corporate profitability with coefficient value of 0.73 and p < 0.01.In other words, the higher score of CSR policies will increase the profitability of the company (ROA), supported by the p-value of lower than 5% significance level of both.This also means that Hypothesis 1 is accepted, since the relationship between CSR policies and profitability is positive, highly significant and direct, hence, Hypothesis 3 is also accepted, as the CSR has a direct positive relationship with Good Corporate Governance.The Hypothesis 1 result is in line with the stakeholder theory that when firms put CSR practices into consideration, they will read a better performance (Yu & Choi,

CSR CP GCG VC
2014).On the other hand, the acceptance of the Hypothesis 3 is in line with the belief that higher commitments of CSR could strongly impact on the qualifications of directors and other members of the company, which combined into a Good Corporate Governance hallmark.Besides, Good Corporate Governance may not be able to increase reputation of the company without also taking care of the social responsibility practices in the company (Chalise, 2014).Moreover, Good Corporate Governance is showing a positive correlation of 0.25 and p = 0.06, which is deemed to be weakly significant.Thus, Hypothesis 2 explains the relationship between GCG and profitability that is positive but weakly significant, and acceptable.This means that when companies are directed and controlled properly, the company could be more efficient in the work and operation, which then results in better performance.
In this case, an increase on efficiency of the work will impact the profit of the company (Sheikh et al., 2013).
Furthermore, the relationship of CSR policies to value creation shows a value of -0.02 with p = 0.45, which means that a higher score of CSR policies, the value of the firm will decrease and this is insignificant.Therefore, Hypothesis 5 is rejected.This is supported by the theory that CSR practices could create long-term value for the company's financial performance instead of giving short-term impact (Gregory, Tharyan, & Christidis, 2013).Moreover, the data also describe an insignificant effect of Good Corporate Governance on value creation of 0.07 and p = 0.35.This means that there is an insignificant positive relationship between the two variables, so Hypothesis 6 is rejected.It possibly happens because corporate governance implementation in a company cannot directly influence the firm's value, but it takes some time.Likewise, the relationship between profitability and value creation shows a negative value of 0.93 with p < 0.01.This means that profitability doesn't give a rise to value creation as it increases.Thus, Hypothesis 4 is also rejected.If profit does not provide an increase on funding of the company, the firm still has to decrease its dividends or choose to increase its debt level for the funding.Both of them give negative impact on the markets and usually result in a decrease of share price and destroy the shareholder's value.

Intervening effect
Table 8 shows the indirect effect and p-values of intervening variables.

Total effect
The total effect refers to the p-values for all variables included in the research.This includes all the direct and indirect effect and being discussed further in Table 9.The calculation of the overall total effect is taking account both direct and indirect variables.As concluded in the results, the strongest absolute effect is the relationship between corporate profitability and value creation, which is 86.49% as compared to other variables.Meanwhile, the relationship between corporate governance and value creation holds the weakest effect as compared to other variables of only 2.79%.The correlation between CSR and profitability is 65.12%, which is higher than if corporate governance acts as the mediating variable.This result is found when adding the result of CSR to corporate governance of 10.24% and corporate governance to profitability 6.25%, which comes out with value of 16.49%.Thus, it can be concluded that the indirect effect does not exist between those two variables and corporate governance does not mediate the relationship between CSR and profitability.In addition, looking at the corporate governance as the mediating variable for CSR and VC relationship, there is also no indirect effect.This is concluded from the value of CSR to value creation of 56.55%.The value is higher than the sum of CSR to corporate governance of 10.24% and corporate governance to value creation of 2.79%, summed up to 13.03%.Thus, indirect effect does not exist when corporate governance mediates the second relationship.In conclusion, corporate governance does not have indirect effect for both of the relationship, when it mediates the relationship between CSR and profitability and CSR and value creation.

CONCLUSION, CONTRIBUTION AND IMPLICATION
The objective of this research paper is to analyze the impact of corporate social responsibility (CSR) policies towards profitability and value creation, as well as whether the corporate governance (CG) is able to become the mediation variable to the relationship.The analysis shows a significantly positive relationship between CSR and profitability.Our contribution to this study is that higher CSR practices and corporate governance are associated with higher profitability obtained by the company, as proposed in H1 and H2.This result indicates that not only consumers are concerned about the products they consume, but also the manufacturers.Thus, companies with higher CSR practices could lead to increase in sales and profit.Besides, Good Corporate Governance makes the company work more efficiently and effectively, which reduces cost or increasing margin and increases profitability.Companies with Good Corporate Governance ensure a socially responsible way of how the companies are run and a lucidly ethical basis for complying with the accepted norms of the society where they operate.Hence, CSR actively searches for a larger equilibrium or consistency between profit and ethics, which is consistent with corporate governance mechanism as proved in H3.
However, profitability has negative effect on the value creation measured.Unless profits provide the increased funding, the firm has to lower the dividends or raise the debt level.The market perceives them negatively and generally leads to price drop, finally damaging shareholder value.It means that for some Indonesian companies listed in Corporate Governance Perception Index (CGPI), the CSR practices level still cannot create long-term performance in terms of EVA.

Figure 1
Figure 1 and Table7show that corporate social responsibility policies affect corporate governance with the coefficient value of 0.32 and p-value 0.02, and it also gives effect on corporate profitability with coefficient value of 0.73 and p < 0.01.In other words, the higher score of CSR policies will increase the profitability of the company (ROA), supported by the p-value of lower than 5% significance level of both.This also means that Hypothesis 1 is accepted, since the relationship between CSR policies and profitability is positive, highly significant and direct, hence, Hypothesis 3 is also accepted, as the CSR has a direct positive relationship with Good Corporate Governance.The Hypothesis 1 result is in line with the stakeholder theory that when firms put CSR practices into consideration, they will read a better performance(Yu & Choi,

Table 2 .
Variable definitions and data source

Table 3 .
Combined loadings and cross-loadings

Table 4 .
AVE table

Table 7 .
Path coefficient and p-values

Table 8 .
Indirect effect and p-values