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September 19, 2025Open Access

Strategy to Prevent Financial Distress Through Increasing Business Efficiency, Utilizing Intellectual Capital and Implementing Good Corporate Governance

Key Points

Business efficiency shows a positive but insignificant effect on financial distress, with a need for better management strategies.
Intellectual capital measured by added value has a positive effect, highlighting its importance in reducing financial distress.
Corporate governance, particularly board recommendations, significantly decreases financial distress, indicating strong oversight is beneficial.
Findings suggest manufacturing companies should enhance governance and intellectual capital to avoid financial distress.

Abstract

Research Objectives: This study aims to examine the effect of business efficiency, intellectual capital proxied by value added capital employed and corporate governance proxied by the recommendations of the board of commissioners on financial distress. Methodology/approach: The population of this study consists of manufacturing companies listed on the Indonesia Stock Exchange during the 2021–2023 period. The sampling technique employed was purposive sampling, resulting in a sample of 208 companies over three years, totaling 628 firm-year observations. The hypothesis testing methods used in this study include confirmatory factor analysis (CFA) and multiple regression analysis. Findings: Based on the results of this study, the effect of business efficiency on financial distress has a positive but insignificant effect, the effect of intellectual capital added value proxied by physical and financial capital added value has a positive effect. In addition, the implementation of corporate governance proxied by the recommendation of the board of commissioners and audit committee expertise has a negative and significant effect on financial distress. Practical implications: This study contributes to companies and investors in minimizing the occurrence of financial distress. Originality/value: Corporate governance in this study is measured based on the Financial Services Authority (OJK) regulations, focusing on the aspect of expertise. Specifically, it includes the educational background of the audit committee and the recommendations of the board of commissioners, which are assessed through the board’s supervisory performance. This study also provides empirical evidence on the prediction of financial distress by examining several key variables, such as business efficiency and intellectual capital, which can serve as early warning indicators to help companies anticipate potential financial distress.

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