Islamic index, independent commissioner and firm performance

Abstract The prime objective of this study is to examine the effect of Sharia firms and their performance in Indonesia. Sharia is the set of personal and societal behaviour derived from Islam. A firm is included in a sharia firm if it complies with Islamic values. The sample used in this study are firms that are consistently listed on the Sharia-compliant Stock Index (ISSI) in the 2012–2018 period. The result shows that Sharia firms have better performance compared to non-Sharia firms. Additionally, Sharia firms with a smaller size of independent commissioners are associated with higher performance. These positive results indicate that Sharia positioning can improve performance and this is empirical evidence that the ethical firm has a significant influence on the performance.


PUBLIC INTEREST STATEMENT
This article analyzes the influence of Sharia firms and their impact on performance in Indonesia. The literature on Sharia firms in Indonesia is still very limited. This study is important because Indonesia is a country with the largest Muslim majority in the world, so measuring the performance of Sharia firm is much-needed onformation. This study found that Sharia firm performed better than non-Sharia firms. These results provide a reference for regulators, management and investors as a consideration in making decisions related to ethical firm performance.
industry in Indonesia is underperformance. This condition raises an interesting topic to be tested in this study. According to the State of the Islamic Report 2018/2019, Indonesia has a Muslim population of 87 per cent of its total population or 13 per cent of the world's Muslim population. Indonesia has the potential to become a Sharia economic actor that will influence the world (Brodjonegoro & Syariah, 2019, p. 26).
The Global Islamic Economy Report also revealed that Indonesia was among the top 10 countries with the most significant number of consumers in several sectors of the halal industry. Indonesia has developed the Islamic economy by establishing a Sharia bank and forming an Islamic capital market to provide an alternative for investors who want to invest with Islamic principles. The first Islamic index, the Jakarta Islamic Index (JII), was established in 2000. Indonesia has three Islamic indexes, namely Jakarta Islamic Index 30 (JII30), Sharia-compliant Stock Indonesia (ISSI), and Jakarta Islamic Index 70 (JII70). However, there is still less evidence that shows how is the performance of Islamic firms in Indonesia.
Based on these reasons, this study aims to provide evidence of the performance of Islamic firms. The sample used in this study consists of firms listed on the Indonesia Stock Exchange (IDX) since 2012-2018. Indonesia has an Islamic capital market that is part of the IDX. Firms that listed in the Islamic capital market are firms that meet the criteria of Islamic principles. The performance of Sharia firms is measured through the Sharia-compliant Stock Indonesia (ISSI). The year 2012 was chosen because that year was when ISSI was established. Furthermore, firms included in the ISSI will be compared to firms that are not included in the ISSI.
Previous research found that Sharia firms have better performance and more profitable than non-Sharia firms in Europe, America, the Bay area, and developing countries (Alam & Rajjaque, 2016;Al-Awadhi & Dempsey, 2017;Jawadi et al., 2014;Kok et al., 2009). There are no significant differences in terms of risk and profit between Islamic and non-Islamic firms, except in Italy and Australia (Abbes, 2012). Still, subsequent research shows that Sharia firms produce a lower risk than non-Sharia firms, especially in crisis (Ashraf & Khawaja, 2016).
Some of the study results are interesting to be explored further, especially for the objects with the large Muslim population. From the demand side, Sharia firms should be the choice of the majority of investors in Indonesia. Still, Indonesia has a non-dominant rating among other Muslim countries.
The results showed that firms included in the Islamic index have a positive and significant relationship with their performance. These results indicate that Sharia firms have better performance than those non-Sharia firms. Additionally, firms included in the ISSI with a smaller size of independent commissioners have better performance.
The remainder of this paper is structured as follows. Section 2 develops the research hypotheses. Section 3 describes the research design. Section 4 specifies the empirical result. Section 5 summarizes the paper and presents concluding remarks.

Islamic capital market
The Islamic Capital Market (ICM) is part of the Indonesia Stock Exchange (IDX) with activities and operations that are not in conflict with Islamic principles. As part of the Indonesian Islamic financial industry, ICM is regulated by the Financial Services Authority (OJK). The institution that governs the application of Sharia principles is the National Sharia Council of the Indonesian Ulema Council in the form of a fatwa (statement of Indonesian Ulema Council). Furthermore, this fatwa was used as the basis for OJK regulations which are binding and to have legal certainty. List of abbreviations and acronym can be seen in Appendix B.
OJK, as an institution tasked with regulating and supervising financial services especially those in the capital market, announces the list of firms included in the Sharia category. OJK will qualitatively oversee the firm's activities to see if the firm's operations do not violate the principles of Sharia and quantitatively examine the terms of the financial ratio limits set.

Relationship of supervision and performance
Several previous studies have shown empirical evidence that firms that get tighter supervision will show better quality. The supervision referred to here is the existence of screening that makes it determined as a sharia firm. Naturally, this screening will make the Sharia firms different from firms that do not pass the screening. This is corroborated by evidence that Sharia status can attract the investors' attention when the firm conducts an initial public offering (IPO) (Tajuddin et al., 2018(Tajuddin et al., , 2019. There is even an improved performance level when a firm is accredited as being Sharia (Hazudin et al., 2017). Even though there are differences in determining the Sharia criteria in various countries, this difference does not affect the performance (Ashraf, 2016). Sharia firms have better-earning quality (Ismail et al., 2015), better performance in the long run (Pepis & de Jong, 2019) and the majority, they have a healthy financial condition (Pok, 2012).

Hypotheses development
A firm can become a Sharia firm if it does not engage in activities such as gambling, Shariaprohibited trading, ribawi (interest base) practices and businesses containing gharar (gambling) practices, selling illicit goods and bribery. Firms must pass quantitative requirements in terms of their financial ratios, namely as the total interest-based debt compared to total assets must be no more than 45% of the total interest income. Non-halal income compared to the total income should be no more than 10%.
The principles of Sharia teach us to do our best work. Good work will lead to good governance and produce excellent performance. This is consistent with Trahan's (2008) research which shows that good governance will consistently deliver outstanding performance (Trahan, 2008). Due to the investors' desire to look for alternatives due to speculative practices, irregularities and ethical issues, Sharia firms are considered to provide alternatives for investors. The religiosity factor is a factor that influences and moderates performance (Adi & Adawiyah, 2018). Other research shows ethical rules and habits can improve company performance (Widyani et al., 2020). The existence of the economic crisis a few years ago has made Western countries take an interest in Islamic economics because Sharia firms proved to be better than non-sharia firms during the crisis (Ashraf & Khawaja, 2016;Jawadi et al., 2014). A study conducted in the United Kingdom shows that Sharia firms have better performance in times of credit tightening (Alam & Rajjaque, 2016). However, broader studies in Europe and America and several other countries show that Sharia firms have better performance (Jawadi et al., 2014). Likewise, in developing countries, Sharia firms show better performance than non-Sharia firms (Gad & Andrikopoulos, 2019). Research conducted in Middle East countries found that Sharia firms have a lower liquidity risk (Al-Awadhi & Dempsey, 2017). In terms of return, Sharia firms are more profitable .
Concerning the level of community religiosity and firm performance, it turns out that areas that have a high level of religion affect the high performance of Islamic banks (Trinugroho et al., 2017). From these empirical results, a hypothesis can be formulated: H1: Sharia firms are more likely to have better financial performance than non-sharia firms Independent commissioners (IC) are one of the indicators of the implementation of good governance practices. Its existence is associated with firm performance. Following OJK regulations, independent commissioners are members of the board of commissioners who come from outside the company. Independent commissioners can act as mediators in conflicts between managers, as well as oversee management policies (Evana, 2020;Mardjono & Chen, 2020). As a party that has no interest, the number of independent commissioners can reduce agency conflicts and guarantee strong supervision to shareholders (Abidin et al., 2009;Hajawiyah et al., 2020). Independent commissioners are seen as essential to protect minority shareholders from fraudulent or criminal practices in the capital market. The presence of an independent commissioner in Indonesia is facultative, meaning that a limited liability firm can have an independent commissioner and not as a complement (Lumentut, 2019). Some of the previous research shows that an independent commissioner affects stock performance (Nawawi et al., 2020). Abidin et al. 2009 proved that the higher the percentage of independent boards will improve performance because the independent boards have diverse backgrounds, characteristics, attributes and expertise that can improve the quality of decision making. However, other studies have shown that the existence of an IC does not affect performance when the performance of the board is less than optimal (Karim & Purwanto, 2020;Prabowo & Simpson, 2011;Setiawan et al., 2019) or if it even has a diverse impact (Harymawan et al., 2020). the hypothesis is: H2: The higher proportion of independent commissioners strengthen the positive associations between sharia firms and firm performance

Sample and data sources
The sample of this study consists of firms listed on the Indonesia Stock Exchange (IDX) using a combination of financial data sourced from OSIRIS and Sharia identification from IDX between 2012 and 2018. Of all of the firms included in IDX, the financial industry was excluded (SIC 6). From the criteria determined, 2,391 items of observation data were obtained. In this study, the data was taken from 2012 onwards because the ISSI was established in that year. All of the variables were winsorized by 1 per cent to eliminate any outliers.

Variable measurements
Sharia firms whose performance is measured refer to those included in the Islamic index. The Financial Services Authority (OJK) periodically announces firms that enter or exit the Islamic index list. Sharia firms included in the ISSI are the primary variable measured using the dummy variable. Variable measuremenr can be seen in Appendix A.

Sharia firm (ISSI)
A firm is said to be a Sharia firm if it is successively included in ISSI and marked with 1, whereas if it is not included in the Islamic index, it will be worth 0.

Firm financial performance
Firm financial performance is the dependent variable measured using the Return on Assets (ROA) ratio (Florio & Leoni, 2017;Huang & Hilary, 2018) calculated from profit before tax divided by the total assets.
The variables used in this study include the number of independent directors, the number of independent commissioners and the number of directors, commissioners and audit commissioners. This is in addition to the use of the BIG 4, leverage, firm size and firm age (Al

Empirical model
We tested the hypothesis using OLS regression by considering the fixed effect of year and the type of industry. The research model is as follows. For the first model, the ISSI coefficient is expected to be positive.  Table 1 shows the distribution of the samples according to the industry group. Of the total 2391 firms, 865 are firms included in the ISSI. In total, 36.18% of firms were included in ISSI and most of the firms were from the manufacturing industry sector (SIC 2).  This table shows the descriptive statistics of the study sample. The average ROA is 5.114 per cent. The number on the boards of directors in each firm is 4.762 while the number of boards is 4.283. The number of independent directors is 0.375 and the total number of independent directors is 0.149. On average, firms that choose to use one of the Big 4 auditors make up 36.7%. The average firm has a leverage of 0.482 while its total assets are 7,949,000. There is a average age of 31,391 years. Table 3 shows the results of the Pearson correlation. The correlation of firms included in the Sharia index (ISSI) with ROA shows positive results, meaning that firms included in the ISSI will have good performance. This table shows the Pearson correlation for all of the study samples. The research sample consisted of 2391 firms included in the Indonesia Stock Index (IDX) from 2004 to 2018 with a significance level of * 10%, 5% for ** and *** for 1%. Table 4 shows the results of the t-test for the firms included that were both ISSI and non-ISSI listed. In this table, the firms included in the ISSI have higher profits and more commissioners, directors and audit commissions. This is in addition to more use of the BIG4 auditors, lower leverage and larger and older firms. Table 5 shows the regression results of the firms included in the ISSI and their relationship with performance. The main variables of concern are Sharia firms and performance in model one (1). This shows a coefficient of 2,427, significant at the 1% level. This means that the firms included in the ISSI have a better level of performance than those not included in the ISSI. This is consistent with the first hypothesis that firms included in the ISSI have better performance than the firms that are not included in ISSI. Following the principles in sharia and Islamic values that good work based on ethics and religiosity will lead to good performance. The sample selection of sharia firms that are consistent in the Islamic index (ISSI) shows a better difference in performance compared to inconsistent Islamic companies. This is in related to Trahan's research (Trahan, 2008) which proves that consistent good governance will produce extraordinary performance.These results are consistent with the research conducted by Jawadi et al. (2014), Gad and Andrikopoulos (2019), and . Firms that are included in the ISSI show excellent performance and this condition is following the latest report by the 2019 Global Islamic Finance Record. This shows that the ranking of Indonesia has ranked first among the Islamic financial markets at the end of 2019.

Empirical results and discussions
The next variable is the interaction between Sharia firms and the existence of an independent commissioner (ISSI_INDCOM). In the second model (2), the coefficient of ISSI_INDCOM is −0.783, which is not significant. This indicates that Islamic firms with an independent number of commissioners above the average do not have a relationship with performance. Even though it is not significant, it produces a negative sign. This means that more independent commissioners in an Islamic firm will reduce its performance. Sharia firms that have independent commissioners below the average show better performance which can be seen from the coefficient of 2.718, which is significant at the level of 1%. These results are the same as Karim and Purwanto (2020) research which proves that the composition of IC does not affect firm performance. However, this result is different from some of the studies that show that more independent commissioners will improve the level of performance because the amount of supervision will reduce violations. Insignificant results could be related to the position of IC in Indonesia, which is considered to be a compliment. Thus the performance of the Sharia firm is driven by its position when entering the Islamic Index, not because of the existence of IC.
Other results from Table 5 show that the higher the number on the board of directors and in the audit commissions, the more this will improve performance. The more commissioners there are, the more that the independent commissioners will reduce their level of performance. Firms that choose B4 auditors will have a better level of performance. Besides that, a more prominent and   Regression models relating to the firm performance. Sharia firm and control variable. All continous variables are winsorized at the 1 per cent and 99 per cent levels. t statistics in parentheses, * p < 0.1, ** p < 0.05, *** p < 0.01. prolonged firm has a better performance relationship. The higher the leverage, the more that it will reduce the firm's performance.
Independent directors have a negative and significant relationship, meaning that the more independent directors there are, the more this will reduce the firm's performance. This result is consistent with Chancharat and Chancharat (2019) study which explains that independent directors do not need to act as representatives of the shareholders when the CEO is dominant when carrying out their role. Another argument is because the firms studied are not as large as the firms in developed countries. There may be principles and levels of compliance that are not suitable to be applied to the object of research. In other studies, the addition of an independent director does not affect profitability (Morikawa, 2020).

Conclusions
This study analyzes the relationship between Sharia firms and their performance, referring to the firms consistently listed on the ISSI in the 2012-2018 period. A firm is identified as a Sharia firm if it meets the conditions set by the OJK. This study used ROA as a performance measure. The results show that Sharia firms have better performance compared to non-Sharia firms. Likewise, Sharia firms that have fewer independent commissioners have a better level of performance. These positive results indicate that Sharia positioning makes the firm have an excellent level of performance. This study contributes to the literature on Islamic finance by providing evidence that Islamic firms have excellent performance. With this result, it should make the decision-makers not doubt the performance of Islamic firms. The existence of speculative practices, irregularities and ethical problems that befall several large companies, making sharia firm a mainstay for investors. Their position as a sharia company is a special attraction.