THE EFFECT OF INTELLECTUAL CAPITAL AND ISLAMIC CORPORATE

GOVERNANCE ON ISLAMIC SOCIAL REPORTING DISCLOSURE

WITH FINANCIAL PERFORMANCE MEDIATION

Ichsan Setiyo Budi1; Rahmawati2

1
Accounting Department, Economics and Business Faculty, Pembangunan Nasional "Veteran" University
Jl. Ringroad Utara 102, Condongcatur, Yogyakarta 55283, Indonesia
2
Accounting Department, Economics and Business Faculty, Sebelas Maret University
Jl. Ir. Sutami 36-A, Kentingan, Surakarta 57126, Indonesia
1
[email protected]; [email protected]

ABSTRACT

This research aimed to examine the indirect effect of Islamic Corporate Governance (ICG) disclosure
and Intellectual Capital (IC) on Islamic Social Reporting (ISR) disclosure with financial performance as a
mediating variable in Islamic Banking in Indonesia. It used secondary data with annual report data sources and
financial statements on Islamic banking in Indonesia. They were testing this research using regression analysis
with data for the annual reporting period of 2011 through 2014. The result finds that ROE mediates the effect of
ICG on ISR disclosure. This shows that good management of Islamic banks will produce high financial
performance so that they are able to carry out their social roles well too. The contribution of this research is to
develop a new model of the role of financial performance mediating the effect of ICG disclosure on ISR so that it
is beneficial for the development of science.

Keywords: Islamic corporate governance, intellectual capital, Islamic social reporting, financial performance

INTRODUCTION

The concern of Islamic banks for the social environment has changed the direction of the
business and changed the image of the bank. In Indonesia, it is emphasized that Islamic banks, in
addition to commercial functions, it must also socially function (Law of Republic of Indonesia Year
2008 Number 21 about Syaria Banking). Corporate Social Responsibility (CSR) is an idea that makes
Islamic banks no longer faced with responsibility that rests on a single bottom line, namely corporate
value that is reflected in financial conditions, but also must be based on a triple bottom lines that also
pay attention to social and environmental responsibility (Elkington & Rowlands, 1999). In terms of
reporting social responsibility through the presentation of accounting information, Haniffa and Hudaib
(2007) have formulated CSR disclosure standards specifically for Islamic banks. The standard derives
from Islamic values and is adjusted to the regulations set by the Accounting and Auditing Organization
for Islamic Financial Institutions (AAOIFI). Haniffa (2002) has argued that reporting social
responsibility can be seen as a response of the company to meet the expectations of the community, for
Islamic institutions such as social responsibility reporting Islamic banking which is expanded by
incorporating a spiritual perspective called Islamic Social Reporting (ISR) (Haniffa, 2002).

Regarding the concept of value in ISR, Haniffa (2002) has explained that Islam wants to
harmonize economic and spiritual activities in running a business. Islam has three interconnected
dimensions, namely seeking the blessing of Allah SWT as the main goal in building socio-economic
justice, providing benefits to society, and achieving prosperity together. ISR carried out by Islamic banks
is basically a form of responsibility to stakeholders, while the responsibility to stakeholders in

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accordance with an Islamic perspective is a responsibility that aims to protect the rights and interests of
all stakeholders as a whole (Iqbal & Mirakhor, 2004). According to Dusuki (2011), the responsibility to
stakeholders within the Islamic framework aims to balance and harmonize the interests of various groups
of stakeholders, based on moral principles, ethics, social responsibility, general interests, namely
avoidance of damage and poverty and the principle of obedience to God’s commands.

The main theories that influence the development of corporate governance are agency theory,
which is primarily concerned with the relationship between managers and shareholders, and stakeholder
theory that takes into account broader environmental groups of constituents (Mallin, 2007). Here the
correlation between corporate governance and the broader group is seen, namely the social environment
of the company. It states that Islam encourages good corporate governance in the company because, in
Islam, the concept of corporate governance aims to protect the interests of all stakeholders by adhering
to sharia principles that are called Islamic Corporate Governance (ICG). As a corporate governance
framework, ICG is the most important practice of Islamic finance in building the trust of shareholders
with the assurance that all transactions, practices, and activities are in accordance with sharia principles,
so that this implementation will color the implementation of corporate social responsibility (Choudhury
& Hoque, 2004; Iqbal & Mirakhor, 2004; Musibah & Alfattani, 2014). Islamic banks are considered to
have a reliable ICG model with a very high level of accountability in order to protect and safeguard the
rights and interests of stakeholders (Sairally, 2013).

ICG values such as responsibility, transparency, independence, justice, discipline, professional,

caring are values that have been integrated with Islamic morals and a Muslim in their activities (Dusuki,
2011). These ICG values are highly upheld in Islam; their implementation can be known through
disclosure (Abu-Tapanjeh, 2009). Thus in the management of Islamic banks, it is expected to disclose
their ICG features to stakeholders, thus enabling stakeholders to assess how banks are managed and
investments managed according to sharia (Darmadi, 2013). The existence of ICG disclosure is useful to
measure the extent to which conformity to sharia values and the impact resulting from the governance
of Islamic banks towards the commitment of social responsibility (Musibah & Alfattani, 2014).

The benefits of the company depend on the knowledge of the company and the best way and
effective use of knowledge. Effective use of knowledge is directed at the company’s interests in the
company’s long-term or going concern. This knowledge is one component of the intellectual capital
(IC) owned by the company. Strong evidence that companies that focus on increasing IC have got good
results for shareholders and competitive advantage (Proctor, Burton, & Pierce, 2006). The use of
intellectual capital to build company value will provide benefits to stakeholders, including the
embodiment of the social mission that is the obligation of Islamic banks. How far the company is able
to utilize intellectual capital for its social mission will be reflected in the disclosure of its social
responsibility. According to Kamath (2007), the banking sector is the ideal company for research of
intellectual capital because: (1) there is reliable data in the form of financial statements, (2) the nature
of the banking sector business is intellectually intensive, and all its employees are more homogeneous
than other economic sectors.

This research is conducted based on stakeholder theory, which then developed into stakeholder
theory from an Islamic perspective. Freeman (1984) has defined the stakeholder as groups or individuals
who may influence, or be influenced by the achievement of organizational goals. Gomes (2006) has
argued that the theory of stakeholder is first introduced in management theory as an answer to
dissatisfaction over the criteria of financial effectiveness unilaterally. A mainstay of stakeholder theory
is that organizational effectiveness that is measured by its ability to satisfy all those with interest in it.
Stakeholder theory from a conventional perspective still has deficiencies that are considered
fundamental, ie, have not included spiritual elements, that is, the relationship of man with God (Chapra
& Ahmed, 2002). Stakeholder in Islam is the party that has the right to the risks of a corporate action
either voluntarily or not so that stakeholders, not just the relation explicitly in the contract or transaction,

96 Journal The WINNERS, Vol. 20 No. 2, September 2019: 95-109

but also implicitly have relevance to the activities of the companies (Iqbal and Mirakhor, 2004). Based
on this theory, Islamic banks carry out social responsibility to fulfill their social functions.

Other theories based on resource-based theory, according to this theory, effective and efficient
use of human resources will lead to improved financial performance is consistent with most studies that
use the VAICTM model as a primary measure of intellectual capital (Kamath, 2007). Based on the
resource-based theory, companies rely on heterogeneous sets of resources and perfect capabilities. These
resources carry important physical assets such as financial matters, property, factories, company
equipment and raw materials, and intangible assets, which include the company’s reputation, work
environment, and human resources. Nevertheless, as resources and abilities become valuable, rare, and
irreplaceable; they can bring a competitive advantage that will create companies that have good financial
performance. With good financial performance, the company is able to carry out social responsibility
well.

Islamic banks, besides functioning commercially but also have social functions. However, the
results of empirical research at home and abroad have found inconsistent results. The results of the
research have found that Islamic banks carry out their social functions (Aburaya, 2012; Beltratti, 2005;
Adiertanto & Chariri, 2013; Giannarakis, 2014; Habbash, 2016; Khan, 2012; Musibah & Alfattani,
2014; Othman, Thani, & Ghani, 2009). The results of the research have found that Islamic banks do not
pay attention to their social functions (Aggarwal & Yousef, 2007; Farook & Lanis, 2007; Hassan &
Harahap, 2010; Khoirudin, 2013; Maali, Casson, & Napier, 2006; Othman & Thani, 2010; Raman &
Bukair, 2013). This research reaffirms the inconsistency of these results by developing a new model,
namely the indirect influence of ICG and IC on ISR, by including financial performance as a mediating
variable. The contribution of this research is to develop a new model and to test the model whether
financial performance mediates the effect of ICG and IC on ISR so that it is beneficial for the
development of science in accounting and stakeholder theory in Islamic concepts.

METHODS

The population of this research is Islamic banking in Indonesia. According to Law about Syaria
Banking, the year 2008 number 21, Article 1 Paragraph 1: Islamic banking consists of Islamic banks
and sharia business units (Law of the Republic of Indonesia Year 2008 Number 21 about Syaria
Banking, 2008). Whereas Article 1 Paragraph 7 states that Islamic banks consist of sharia commercial
banks and sharia people’s financing banks. According to 2015, Sharia Banking Statistics issued by BI,
the number of sharia business units are 22, sharia commercial banks are10, and sharia people’s financing
banks are 165. From this data, it can be seen that the number of Islamic banks in Indonesia up to 2015
is 199; thus, the population of this research is 199.

The sampling technique in this research is convenience sampling. Convenience sampling is the
collection of information from members of the population that are fully available in accordance with the
needs of the research (Sekaran & Bougie, 2016). From the existing population, only sharia commercial
banks provide complete and easy information to obtain it through their websites, so that the sample of
this research is ten banks. The ten banks are; Bank Syariah Mandiri, Bank BNI Syariah, BRI Syariah,
Bank Muamalat Indonesia, BCA Syariah, Bank Mega Syariah, Bank Bukopin Syariah, Bank Jabar dan
Banten Syariah, Panin Syariah Bank, and Maybank Syariah. The data sources are the annual report,
financial reports, and GCG reports issued by each sharia commercial bank in Indonesia from 2011 to
2014. Thus a sample of 40 observations can be obtained, and the data can be obtained on the websites
of each bank. Data collection methods used in this research is content analysis. The purpose of content
analysis is to identify the characteristics or specific information contained in a document to produce an
objective and systematic description (Sekaran & Bougie, 2016).

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 The dependent variable of this research is the level of ISR disclosure measured using the Islamic
Social Reporting (ISR) index compiled by Hassan and Harahap (2010), which consists of 78 disclosure
items that are adjusted to AAOIFI guidelines. The ISR index classifies its indicators into eight disclosure
themes, namely: (1) ethical behavior, stakeholder engagement, and customer relations, (2) corporate
governance - board of directors and top management (CG-BD & TM), (3) sharia-compliant corporate
governance - SSB, (4) product, services, and fair dealing with supply chain (PS & FDSC), (5)
environment, (6) employees, (7) strategic social development, and (8) research, development, and
training. Further assessment is done using scoring where: (a) value 0 if there is no related disclosure of
the item. (b) Value 1 if there is a disclosure related to the item, if all items have been disclosed, then the
maximum value that can be reached is 78.

The independent variables of this research are Islamic corporate governance and intellectual
capital. Islamic corporate governance, based on previous research (Darmadi, 2013), this research uses
the ICG index of Islamic banking disclosure in Indonesia. The ICG disclosure index is calculated by the
presence of disclosures for each ICG mechanism grouped into seven dimensions, namely: (1) Sharia
Supervisory Board (SSB), (2) board of commissioners, (3) board of directors, (4) board of committees,
(5) internal control and external auditing, (6) risk management, and (7) reporting on CG implementation.
Overall it consists of 72 items of disclosure, and then scoring is done as done on the dependent variable.
Intellectual capital is the performance of intellectual capital as measured by the value-added created by
Value Added Capital Employee (VACA), Value Added Human Capital (VAHU), and Structural Capital
Value Added (STVA). The combination of the three added values is symbolized by the name VAICTM
developed by (Pulic, 2000). Value Added (VA) is calculated as the difference between output and input.
Value Added Capital Employed (VACA) is an indicator of the value-added created by a unit of physical
capital. This ratio shows the contribution of each unit capital employee to the organization’s value-
added. Value Added Human Capital (VAHU) shows how much value-added can be generated with
funds spent on labor. Structural Capital Value Added (STVA) measures the amount of structural capital
needed to produce value-added and is an indication of structural capital’s success in value creation.
Value Added Intellectual Capital Coefficient (VAICTM) is the sum of the three previous components,
namely: VACA, VAHU, and STVA.

Financial performance: ROA, ROE are a mediating variable to measure bank performance in
terms of profitability. Previous researches of this ratio are to analyze the financial performance of banks
or other types of companies. ROA is the net profit/amount of assets, while ROE is net profit/amount of
equity (Azid, Asutay, & Burki, 2007).

RESULTS AND DISCUSSIONS

The following are the results of descriptive statistics explaining the number of respondents, the
minimum and maximum answers, the average value, the deviation value of the respondent’s answer,
and the value of the coefficient of variance.

Table 1 Descriptive Statistics Test Results

N Min Max Mean Std. Deviation Variance

ISRDI 40 0,5666 0,8846 0,7536 0,0808 0,007
ICGDI 40 0,7778 0,9723 0,9032 0,0459 0,002
ROA 40 0,0017 0,0381 0,0170 0,0096 0,000
ROE 40 0,0229 0,3313 0,1187 0,0915 0,008
VAIC 40 1,3248 4,6140 2,3717 0,8750 0,766
Valid N (listwise) 40
Source: Data processed

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 Table 1 explains that the ISRDI variable with a minimum value of the ISR disclosure index is
0,5666, and a maximum is 0,8846. The average ISR disclosure index is 0,7536, with a standard deviation
of 0,0808; this indicates that the ISR disclosure index value does not experience deviations that are far
from the average range. This is supported by the variance coefficient value for the ISRD variable of
0,007, which indicates that the variation in the value of the ISR disclosure index in Islamic banking in
Indonesia is almost the same. ICGDI variable with a minimum value of ICG disclosure index of 0,7778
and a maximum of 0,9723. The average ICG disclosure index is 0,9032, with a standard deviation of
0,0459 that indicates the ICG disclosure index value does not experience deviations far from the average
range. This is supported by the variance coefficient value for the ICGDI variable of 0,002, which
indicates that the variation in the ICG disclosure index value for Islamic banking in Indonesia is almost
the same. ROE variable with a minimum value is 0,0229 or 2,3% and a maximum is 0,3313 or 33,1%.
The average ROE value in Islamic banking in Indonesia is 0,1187, with a standard deviation of 0,0915.
This indicates that the ROE value does not experience a deviation that is far from the average range.
This is supported by the variance coefficient value for the ROE variable of 0,008, which indicates that
the variation in the value of ROA in Islamic banking in Indonesia is almost the same. Variable ROA
with a minimum value is 0,0017 or 0,1% and a maximum of 0,0381 or 3,8%. The average ROA value
in Islamic banking in Indonesia is 0,0170, with a standard deviation of 0,0096 that indicates the value
of ROA does not experience deviations that are far from the average range. This is supported by the
variance coefficient value for the ROA variable of 0,000, which indicates that variations in the value of
ROA in Islamic banking in Indonesia are the same. VAIC variable with a minimum value is 1,3248 or
13,2% and a maximum is 4,6140 or 46,1%. The average VAIC value in Islamic banking in Indonesia is
2,3717, with a standard deviation of 0,8750, indicating that VAIC values do not experience deviations
far from the average range. This is supported by the value of the coefficient of variance for the VAIC
variable of 0,776, which indicates that the variation in the value of VAIC in Islamic banking in Indonesia
is almost the same.

Table 2 Summary of Testing H1

ISRDI= a0 + a1(ICGDI)1it + eit

Description Result Sign
Coeff. ICGDI 0,995717 0,0000
t-Stat 6,167683
Adjusted R2 0,487114
Source: Data processed

Table 2 concludes the results that statistically at the significance level of 5% ICG disclosure has
an effect on ISR disclosure with a determination coefficient of 0,487114, which means that the
independent variable of ICG disclosure is able to explain the dependent variable of ISR disclosure of
48,7% and with a positive coefficient of 0,995717, the result statistically H1 is accepted.

These results are consistent with previous researches by Adiertanto and Chariri (2013);
Giannarakis, 2014; Habbash, 2016; Khan, 2012; Maali, Casson, and Napier (2006); Musibah and
Alfattani (2014); Othman, Thani, and Ghani (2009). The large ICG disclosure index illustrates the
implementation of good corporate governance principles in each ICG structure in Islamic banking in
Indonesia. This means that each ICG structure on Islamic banks consisting of SSB, Board of
Commissioners and Board of Directors, Board Committee, Internal Control and External Audit, Risk
Management, and Reporting on CG Implementation in operation holds the principles of transparency,
accountability, responsibility, independence and fairness, and equality. These principles are also applied
by management in carrying out their social functions. Such conditions will color the Islamic bank ISR
so that the annual report as a media reporting by Islamic banking in Indonesia to many stakeholders

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provides reports of social activities that have been carried out in accordance with Islamic regulations
and values.

The summary of the results of the hypothesis testing of the influence of Intellectual Capital on
the ISR disclosure index can be seen in Table 3.

Table 3 Summary of Testing H2

ISRDI= b0 + b1(VAICTM)1it + eit

Description Result Sign
Coeff. VAICTM -0,038505 0,0074
t-Stat -2,829006
Adjusted R2 0,152234
Source: Data processed

Table 3 summarizes the results that statistically, at the 5% IC significance level, negatively
affect the ISR disclosure index. The results are statistically rejected by H2, which states that there is a
positive effect of IC on ISR disclosure. A negative coefficient value, which means the two variables are
negatively related. While testing the H2 hypothesis is statistically rejected. This illustrates that Islamic
banking in Indonesia shows that the skills and knowledge of human resources to build a competitive
advantage for Islamic banks in Indonesia but has not been focused on the sharia bank social program.
Another interpretation is to show that the structural capital of Islamic banks in Indonesia, which includes
organizational structures, systems, procedures, culture, databases, and others, is focused on corporate
social responsibility programs.

The summary of the results of testing the hypothesis of the effect of ICG disclosure on the
financial performance of ROA can be seen in Table 4.

Table 4 Summary of Testing H3a

ROA = c0 + c1(ICGDI)1it + eit

Description Result Sign
Coeff. ICGDI -0,070256 0,0337
t-Stat -2,203067
Adjusted R2 0,089923
Source: Data processed

Table 4 concludes the results that statistically, at the significance level of 5%, ICG has a negative
effect on ROA financial performance. The results are statistically rejected H3, which states that there is
a positive effect of ICG on the financial performance of ROA. A negative coefficient value, which
means the two variables are negatively related.

The summary of the results of testing the hypothesis of the effect of ICG disclosure on ROE
financial performance can be seen in Table 5.

Table 5 concludes the results that statistically, at the significance level of 5%, ICG disclosure
has a positive effect on ROE financial performance with a determination coefficient of 0,164763. It
means that the independent variable ICG disclosure is able to explain the dependent variable financial
performance ROE of 16,47% and positive coefficient 0,861062, results the statistics are H3b accepted.

100 Journal The WINNERS, Vol. 20 No. 2, September 2019: 95-109

 Table 5 Summary of Testing H3b

ROE = d0 + d1 (ICGDI)1it + eit

Description Result Sign
Coeff. ICGDI 0,861062 0,0054
t-Stat 2,948444
Adjusted R2 0,164763
Source: Data processed

Table 6 concludes the results that statistically, at the significance level of 5%, IC has a positive
effect on financial performance ROA with a determination coefficient of 0,461955. It means IC
independent variables are able to explain the dependent variable financial performance ROA of 46,19%,
and with a positive coefficient of 0,007547, the results are statistically H4a is accepted.

Table 6 Summary of Testing H4a

ROA = e0 + e1 (VAICTM)1it + eit

Description Result Sign
Coeff. VAICTM 0,007547 0,0000
t-Stat 5,872360
Adjusted R2 0,461955
Source: Data processed

Table 7 concludes the results that statistically, at the 5% IC significance level does not affect
ROE financial performance; the results are statistically H4b rejected. A negative coefficient value which
means the two variables are negatively related.

Table 7 Summary of Testing H4b

ROE = f0 + f1 (VAICTM)1it + eit

Description Result Sign
Coeff. VAICTM -0,008736 0,6084
t-Stat -0,516655
Adjusted R2 -0,019157
Source: Data processed.

The results of statistical testing of the effect of ICG and IC disclosures on financial performance
ROA and ROE show mixed results. For the effect of ICG disclosure on ROA, it gives insignificant
results for Islamic banking in Indonesia, even both (ICG and IC) have a negative relationship to ROA.
This could be possible because Islamic banking in Indonesia is still in the growth cycle, so the
management of the resulting Islamic banks is mostly used for the development or opening of new offices
in Indonesia so that asset growth is very high for each year, thus the trend of ROA decreases. While, the
effect of ICG disclosure on ROE is significant, which means that the wider disclosure of ICG in Islamic
banking in Indonesia will have an impact on the higher ROE. This finding reinforces the results of
previous research, namely Faozan (2013), which states that ICG in Islamic banking is a management
system designed to improve bank performance, protect stakeholder interests, and improve compliance
with legislation and generally applicable ethical values. This result is also in line with other previous
studies (Ado, 2016; Al-Baidhani, 2013; Al-Hussain, 2009; Choudhury & Hoque, 2004; Dalwai et al.,
2014; Hamza, 2013; Hassan Al-Tamimi, 2012; Quttainah, 2012; Sam’ani, 2008; Rehmans & Mangla,

The Effect of Intellectual …… (Ichsan Setiyo Budi; Rahmawati) `101

2010; Yaghoobnezhad, Nikoomaram, & Salteh, 2012). The influence of IC on ROA gives significant
results for Islamic banking in Indonesia, which means that IC has a positive effect on ROA. This shows
that Islamic banking in Indonesia considers intellectual capital, especially human resources, to be a very
important factor. Other interpretations show that Islamic banking in Indonesia can already utilize IC to
support the achievement of optimal financial performance ROA. Structural capital includes information
systems, knowledge, organizational processes and procedures, trademarks and patents, and other IC can
be implemented to improve financial performance.

Table 8 concludes the results that statistically at the 5% significance level of financial
performance, ROA has a negative effect on ISR disclosure. The results are statistically H5a rejected,
which states that ROA has a positive effect on ISR disclosure. A negative coefficient value which means
the two variables are negatively related.

Table 8 Summary of Testing H5a

ISRDI = g0 + g1(ROA)1it + eit

Description Result Sign
Coeff. ROA -3,944212 0,0024
t-Stat -3,260105
Adjusted R2 0,197998
Source: Data processed

Table 9 concludes the results that statistically at the 5% significance level of ROE financial
performance has a positive effect on ISR disclosure with a determination coefficient of 0,35891. It
means that the independent financial performance ROE variable is able to explain the dependent variable
ISR disclosure of 35,89%, and with a positive coefficient 0,540716, results statistically H5b is accepted.

Table 9 Summary of Testing H5b

ISRDI = h0 + h1(ROE)1it + eit

Description Result Sign
Coeff. ROE 0,540716 0,0000
t-Stat 4,778521
Adjusted R2 0,358914
Source: Data processed

The results of testing the hypothesis can be stated that there is a positive influence on the
performance of Islamic banks (ROE) on the ISR disclosure index, the greater the ROE of Islamic banks
in Indonesia, the greater the value of the ISR disclosure index. These results are consistent with previous
researches (Anas, Rashid, & Annuar, 2015; Ayadi, 2004; Giannarakis, 2014; Janggu, Joseph, & Madi,
2007; Nawaiseh, Boa, & El-shohnah, 2015; Othman, Thani, & Ghani, 2009; Shazila, 2012; Tagesson et
al., 2009; Tagesson, Klugman, & Ekström, 2013; Siregar & Bachtiar, 2010; Yüksel & Özsari, 2017).
This finding supports theories that form the basis of the relationship between financial performance and
ISR disclosure, as suggested by Inchausti (1997). When viewed from the point of view of the Islamic
banking agency theory in Indonesia with the performance of banks, they continue to provide detailed
information to support their compensation positions and arrangements. Moreover, from a political
process theory, Islamic banks that earn profits will provide more information in disclosure for their
profit recognition.

102 Journal The WINNERS, Vol. 20 No. 2, September 2019: 95-109

 This finding is also consistent with the findings of Siregar and Bachtiar (2010), where
companies with more profits will devote more financial resources to social initiatives. Consistency with
other research findings, for example, Haniffa and Cooke (2002), have said that companies that make a
profit will provide more information about ISR to legitimize their existence. It is further explained that
the positive relationship between profitability and the level of ISR disclosure is due to management’s
freedom and flexibility to publish more ISR initiatives to shareholders. Tagesson et al. (2009) have said
that if a company earns a profit, there is a positive relationship with the level of CSR disclosure because
the company can pay the cost of CSR disclosure. Likewise, Giannarakis (2014) has said that companies
that make profits tend to reveal more information than less profitable companies because management,
known as agents, wants to know that they have acted in the best interests of the shareholders. Janggu,
Joseph, and Madi (2007) have said that companies with a higher level of profitability tend to reveal
more information than companies with low levels of profitability.

Testing the following hypothesis is testing whether financial performance consisting of ROA
and ROE, mediates the effect of ICG and IC disclosures on ISR disclosures. The summary of the results
of testing the hypothesis of financial performance ROA, which apparently does not mediate the effect
of ICG disclosure on ISR disclosures, can be seen in Table 10.

Table 10 Summary of Testing H6a

Desc Regression 1 Regression 2 Regression 3 Regression 4

ICGDI on ISRDI ICGDI on ROA ROA on ISRDI ICGDI, ROA on ISRDI
Coeff. 0,995717 0,0000 -0,07025 0,0337 0,892329 0,0000
Coeff. -3,944212 0,0024 -0,783283 0,0316
t-Stat 6,167683 -2,20306 -3,260105
F-stat 23,51197 0,0000
Adjusted R2 0,487114 0,08992 0,197998 0,535847
Source: Data processed

Table 10 shows that the conditions for mediation are not fulfilled because the 2, 3, and 4
regression equations are negative, which means there is a negative relationship between the independent
and dependent variables. With the statistical results, hypothesis H6a is rejected, which means that the
financial performance of ROA does not mediate the effect of ICG disclosure on ISR disclosure. The
summary of the results of testing the financial performance hypothesis ROE mediating the effect of ICG
disclosure on ISR disclosures can be seen in Table 11.

Table 11 Summary of Testing H6b

Desc Regression 1 Regression 2 Regression 3 Regression 4

ICGDI on ISRDI ICGDI on ROE ROE on ISRDI ICGDI, ROE on ISRDI
Coeff. 0,995717 0,0000 0,861062 0,0054 0,958597 0,0000
Coeff. 0,540716 0,0000 0,333448 0,0019
t-Stat 6,167683 2,948444 4,778521
F-stat 29,73144
Adjusted R2 0,487114 0,164763 0,358914 0,595699
Source: Data processed

Table 11 shows a summary of the statistical results in the first equation regression analysis. It
is found that statistically significant ICG disclosure has a positive effect on ISR disclosure (Sig. <0,05)
with a coefficient of 0,9957. Regression analysis in the second equation finds that statistically significant

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ICG disclosure has a positive effect on ROE financial performance (Sig. <0,05) with a coefficient of
0,8610; the higher ICG disclosure index would improve ROE financial performance. The third equation
regression analysis finds that statistically significant ROE financial performance has a positive effect on
ISR disclosure (Sig. <0,05) with a coefficient of 0,5407. The results of the fourth equation regression
analysis find that ROE financial performance has a positive effect on ISR disclosure after controlling
for the effect of ICG disclosure on ISR disclosure (Sig. <0,05) with a coefficient of 0,9585. The direct
effect coefficient between ICG disclosure of ISR disclosures is 0,9957, but after ROE’s financial
performance controls the relationship, both of them decrease to 0,9585; thus, partial mediation occurs
(Ghozali, 2006). From the results of this statistical test hypothesis, H6b is accepted, which means that
financial performance ROE mediates partially the effect of ICG disclosure on ISR disclosure.

Testing the following hypothesis is testing whether financial performance consisting of ROA
and ROE mediates the effect of IC on ISR disclosure, which turns out that the results of statistical tests
are not proven. The summary of the results of testing the financial performance hypothesis ROA, which
results do not mediate the effect of ICG disclosure on ISR disclosure can be seen in Table 12.

Table 12 Summary of Testing H7a

Desc Regression 1 Regression 2 Regression 3 Regression 4

TM TM VAICTM , ROA on
VAIC on ISRDI VAIC on ROA ROA on ISRDI
ISRDI
Coeff. -0,038505 0,0074 0,007547 0,0000 -0,01666 0,3690
Coeff. -3,944212 0,0000 -0,89371 0,0924
t-Stat -2,829006 5,872360 -3,260105
F-stat 5,703450
Adjusted R2 0,152234 0,461955 0,197998 0,194330
Source: Data processed

Table 12 shows that the conditions for mediation are not fulfilled because 1, 3, and 4 regression
equations are negative, which means there is a negative relationship between the independent and
dependent variables. With these statistics, hypothesis H7a is rejected. Table 13 shows a summary of the
H7b test where the conditions for mediation are not fulfilled because the 1, 2, and 4 regression equations
are negative, which means there is a negative relationship between the independent and dependent
variables. With the results of these statistics, the hypothesis H7b is rejected.

Table 13 Summary of Testing H7b

Desc Regression 1 Regression 2 Regression 3 Regression 4

TM TM VAICTM , ROE on
VAIC on ISRDI VAIC on ROE ROE on ISRDI
ISRDI
Coeff. -0,038505 0,0074 -0,00873 0,6084 -0,03401 0,0029
Coeff. 0,540716 0,0000 0,51355 0,0000
t-Stat -2,829006 -0,51665 4,778521
F-stat 19,2703
Adjusted R2 0,152234 -0,01915 0,358914 0,48372
Source: Data processed

The results of statistical tests show that the financial performance of ROA does not mediate
both the effect of ICG disclosure on ISR disclosure and the influence of Intellectual Capital on ISR
disclosure. For financial performance, ROE mediates the effect of ICG disclosure on ISR disclosures

104 Journal The WINNERS, Vol. 20 No. 2, September 2019: 95-109

but does not mediate the influence of Intellectual Capital on ISR disclosures. ROE’s financial
performance successfully mediates the effect of ICG disclosure on ISR disclosures. This finding shows
that Islamic banking management with high compliance with all sharia regulations and provisions will
play a role in increasing social contributions to Islamic banks. This explains that Islamic governance
will produce good financial performance so that it is able to carry out social responsibility well too. The
fulfillment of this mediation also shows that Islamic banking management in Indonesia has been able to
make a fair financial policy for the operational benefits of Islamic banks for the benefit of equity holders
and needs such as zakat, qardul hasan, and other social needs.

The fulfillment of mediation with ROE performance could also be due to higher ROE in Islamic
banking in Indonesia compares to ROA. This shows that Islamic banking management is very concerned
about the interests of equity holders who are concentrated in certain parties, namely the conventional
commercial banks of their affiliation. Almost all Islamic banking in Indonesia are established by
conventional bank affiliates that have long been operating.

CONCLUSIONS

There is a positive effect of ICG disclosure on ISR disclosure; the greater the ICG disclosure
index, the greater the ISR disclosure index. The large ICG disclosure index illustrates the
implementation of good corporate governance principles in each ICG structure in Islamic banking in
Indonesia. This means that each ICG structure on Islamic banks holds the principle of transparency,
accountability, and responsibility. These principles are also applied by management in carrying out their
social functions. Such conditions will color the Islamic bank ISR so that the annual report as a media
reporting by Islamic banking in Indonesia to many stakeholders provides reports of social activities that
have been carried out in accordance with Islamic regulations and values.

ICG and IC disclosures on financial performance ROA and ROE show mixed results. For the
effect of ICG disclosure on ROA, it gives insignificant results for Islamic banking in Indonesia, even
both (ICG and IC) have a negative relationship to ROA. While the effect of ICG disclosure on ROE is
significant, which means that the wider disclosure of ICG in Islamic banking in Indonesia will have an
impact on the higher ROE. The influence of IC on ROA gives significant results for Islamic banking in
Indonesia, which means that IC has a positive effect on ROA. This shows that Islamic banking in
Indonesia considers intellectual capital, especially human resources to be a very important factor.

ROA does not have a positive effect on ISR disclosure, but there is a positive influence on the
performance of Islamic banks (ROE) on the ISR disclosure index; the greater the performance of Islamic
banks in Indonesia, the greater the ISR disclosure index value. This illustrates that Islamic banks always
carry out these obligations even though their implementation requires large funds, but it is supported by
the acquisition of ROE in Islamic banks. Financial performance ROA does not mediate both the effect
of ICG disclosure on ISR disclosure and the influence of Intellectual Capital on ISR disclosure. For
financial performance, ROE mediates the effect of ICG disclosure on ISR disclosures, but it does not
mediate the influence of Intellectual Capital on ISR disclosures. ROE’s financial performance
successfully mediates the effect of ICG disclosure on ISR disclosures. This explains that Islamic
governance will produce good financial performance so that it is able to carry out social responsibility
well too.

This research has several limitations and is expected to be improved in future research. The
limitations of this research are; (1) it uses the ICG and ISR disclosure variables, but the researchers do
not discuss the quality of disclosure. The number of disclosure indicators does not indicate the quality
of company information disclosure. (2) This research finds that bank performance is proven to mediate

The Effect of Intellectual …… (Ichsan Setiyo Budi; Rahmawati) `105

the effect of ICG disclosure on ISR, but only partial mediation. Future researches consider the quality
of disclosure, namely completeness, accuracy, and reliability as characteristics of disclosure quality to
produce better research findings, and subsequent studies try other variables as mediating the effect of
ICG disclosure on ISR to find full mediation. Other further research suggestions are to obtain a strong
generalization, and because the number of sharia commercial banks in Indonesia, which is still small,
subsequent research may not limit the banking sector only, but also in other sectors such as insurance.
It is necessary to try to add other financial performance that might mediate, not only profitability
performance but liquidity performance, for example, such as cash ratio, loan to deposit ratio, or loan to
asset ratio. Because it is possible to fulfill the liquidity of an Islamic bank, it is free to implement social
programs. Finally, mediation testing is carried out for each component of VAICTM because testing each
component will produce more detailed research findings.

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