Politically connected independent supervisory board and financial distress during the COVID-19 pandemic

Candra, Anastasya Regina and Joni, Joni (2025) Politically connected independent supervisory board and financial distress during the COVID-19 pandemic. Journal of Accounting in Emerging Econmies. ISSN 2042-1176

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Abstract

Purpose – This study aims to examine the relationship between politically connected independent supervisory boards (POL-ISB) and financial distress in companies listed on the Indonesia Stock Exchange from 2018 to 2021. Design/methodology/approach – This study uses 934 firm-year observations to investigate this association. The analysis was conducted using ordinary least squares, sub-sample analysis (stratified analysis) and additional analysis tests such as the endogeneity test using the generalized method of moments (GMM). Findings – The results indicate that political connections are associated with an increased likelihood of financial distress. During the COVID-19 pandemic, this association exacerbated the financial difficulties faced by companies. This study also found that companies with political connections through their independent supervisory boards were associated with a higher financial distress rate during the COVID-19 pandemic. These findings remain consistent after conducting additional tests using the GMM to address endogeneity issues. Research limitations/implications – This study is limited to examining financial distress, as it considers only the factors of political connections at the level of company financial distress. Furthermore, the research focuses on political connections during President Joko Widodo’s leadership period without considering previous leadership eras. Additionally, this research relies solely on information about political connections based on the profiles of independent supervisory boards in companies’ annual reports. Practical implications – This study contributes to the literature on corporate governance in Indonesia during the COVID-19 pandemic, as well as to the expansion of literature related to the effectiveness of independent boards of commissioners with political connections in conditions of financial distress. This highlights the crucial role of the independent board of commissioners in overseeing operational activities and providing resources through their experience and social networks. Moreover, this study offers practical implications for the dual-board governance systems of Indonesian companies. Originality/value – We highlight the important role of POL-ISB in financial distress in Indonesia. This research offers practical implications for the dual-board governance system in Indonesian companies.

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