Gradual steps to understanding sound corporate governance<\/p>\n
By George S. Tahija<\/p>\n
The following article is an excerpt from a paper presented at
\nthe APEC Symposium in Sydney on Nov. 3, 1998.<\/p>\n
SYDNEY: Indonesia is undergoing many changes. Major
\ntransitions are taking place in the sociopolitical and industrial
\nstructure. To look at corporate governance in perspective, it is
\nnecessary to understand the nature and magnitude of these
\nchanges.<\/p>\n
First, our society is emerging from a period of feudalistic
\nand paternalistic government. We are desperately searching for
\nsome form of democratic government that will allow all
\nIndonesians to feel fairly represented. We must also ensure
\nprosperity, and above all, on-going unity of the nation.<\/p>\n
Second, as the technological revolution sweeps the world, we
\nare beginning to depart from being a traditional agricultural and
\nindustrial society. Indonesia's public and political institutions
\nfind themselves becoming vehicles catering to the past. They are
\nunable to cope with present needs and certainly unable to
\nanticipate future demands.<\/p>\n
Indonesia's recent troubles reflect the dire consequences of
\nfailure to manage the transition. In the short term, political
\nparties and public institutions responsible for governance of
\nfinance and banking will be the focus of attention. In the medium
\nterm, education, health and the environment must surely become
\nthe focus of reform.<\/p>\n
Most companies on the Jakarta Stock Exchange are only one step
\nremoved from their origins. Most started as family run businesses
\nor government business units where the owners had free reign.
\nThese companies are still grappling with the transition, and the
\nmajority probably view corporate governance as a hindrance rather
\nthan an important support to corporate development.<\/p>\n
Managing these changes is a challenge under any circumstances,
\nlet alone during this period of unprecedented and severe economic
\ncrisis.<\/p>\n
Corporate governance is a relatively recent phenomenon in its
\ncurrent form. Until the late 1980s, and subject to the
\nconstraints of Company Law and Stock Exchange Listing Procedures,
\nself-regulation of companies was the norm. This self-regulation,
\nin practice, was limited to the presence of a few nonexecutive
\ndirectors, probably selected by management. Audit committees and
\nremuneration committees were the exception rather than the rule,
\ncertainly in countries such as the UK, Australia and Singapore.<\/p>\n
In many developed economies, standards of corporate governance
\nwere subjected to scrutiny after the financial scandals of the
\n1980s. The aftermath of these scandals and the resultant
\nfinancial turmoil changed attitudes toward corporate governance
\nin virtually every developed economy.<\/p>\n
Developed economies have the advantage of being able to build
\ncorporate governance on a foundation of political stability, a
\nsolid body of law and impartial implementation of that law,
\nprofessional services, including accountants and lawyers, and a
\nsound banking system. There must also be a cadre of people
\nprepared to accept positions as nonexecutive directors who
\nunderstand their fiduciary duties, and most importantly, have the
\ncourage to meet their obligations. Of course, none of this should
\nbe static. Regulatory frameworks and institutions, including
\nthose in the banking system, must constantly evolve to meet
\nchanging needs.<\/p>\n
Until the mid 1980s, economic growth was driven by the
\ngovernment and funded mainly by oil and gas exports. When oil and
\ngas revenues declined in the mid 1980s, the government wisely
\nembarked on a liberalization program to diversify its sources of
\nincome. It also began to share its role in development with the
\nprivate sector.<\/p>\n
First, in 1986, the government initiated extensive
\nderegulation of trade and business to boost non-oil and gas
\nexports. It encouraged larger and broader participation of both
\nforeign and local capital in industries that were traditionally
\ngovernment owned, such as powers, telecommunications and
\ntransportation.<\/p>\n
Second, the deregulation of the banking sector in 1988 was
\ninitiated to increase the availability of credit to fuel further
\ngrowth.<\/p>\n
These efforts were successful. Non-oil exports grew from 30
\npercent to 70 percent of total export revenues. In less than
\neight years, the private sector replaced the government as the
\nmain engine of growth and employment. This in itself was a major
\nachievement. Unfortunately, much of this impressive growth by the
\nprivate sector was supported by equally impressive amounts of
\ndebt, which would eventually put the entire country in a
\nvulnerable position.<\/p>\n
Strategically, the government had taken the right steps. What
\nremained unaddressed were a weak legal system, a weak audit
\nregime and breaches of the banking regulations on a massive
\nscale. This was a major mistake because it encouraged
\nunsustainable business practices to flourish unabatedly.<\/p>\n
It was commonly known that we had a high-cost economy caused
\nby collusion, corruption and favoritism. Political and economic
\nobservers had for years warned of the dangers of these practices
\nand urged reform.<\/p>\n
Few in the government and private sector paid attention to
\nthose warnings while economic growth continued. Frankly, the
\ninternational investment and financial community continued to
\nprovide financing to the private sector in increasingly large
\namounts. International investment banks competed with each other
\nfor advisory and lead underwriting roles to the very cronies they
\nare now complaining about. The World Bank and the IMF, until
\n1996, gave rave reviews on Indonesia's economic achievements and
\nportrayed us as a model developing country.<\/p>\n
So it is not surprising that there was little, if any,
\nincentive for reform. Greed, arrogance and complacency on all
\nsides (from within and without) overruled ethics and good
\njudgment.<\/p>\n
Globalization and liberalization were the trigger rather than
\nthe cause of Indonesia's financial collapse. Internal weakness
\nand irresponsible capitalism were the root cause.<\/p>\n
What can we do to achieve better corporate governance?<\/p>\n
The stage needs to be set before corporate governance can
\nhappen. Above all else, we must have a political system with
\ntransparent checks and balances. Until there is a more democratic
\npolitical system, concentrations of power and influence will
\noccur in society. This concentration of influence will inevitably
\nencourage collusion and corruption. Regulation and enforcement
\ncannot function equitably in this environment. In the past, this
\nhas led to directed lending to preferred parties, rigged stock
\nmarkets, politically favored companies and many regulatory
\n\"exceptions\".<\/p>\n
In Indonesia, the salary of civil servants must be increased
\nfor two reasons. First, it is unfair and unrealistic to expect
\nregulators and enforcers to act impartially when their salaries
\ndon't even cover basic needs. Second, we must improve salaries in
\norder to attract capable young people into government service.<\/p>\n
Business leaders must set the example for responsible
\ncapitalism. We are part of a much larger society, without which
\nwe will not survive. When the interests of a few outweigh the
\ninterest of many, sustainable development becomes impossible.
\nEvery one looses. This has become painfully apparent in
\nIndonesia. Business leaders need to focus on:<\/p>\n
* improving productivity and quality of assets rather than just
\ngoing for asset growth<\/p>\n
* building competitive businesses rather than just trading assets<\/p>\n
* viewing good corporate governance as a competitive advantage
\nrather than a regulatory burden<\/p>\n
* rethinking the viability of the so-called diversified
\nconglomerate.<\/p>\n
Until the financial crisis began last year, international
\nfinancial institutions such as banks, securities companies and
\nfund managers were actively raising money for Asian corporates
\nthat were clearly engaged in less than transparent practices. In
\npursuit of fee income, financial institutions have basically been
\nrewarding the very type of behavior that erodes the fabric of
\nsociety and the foundation on which good corporate governance is
\nbuilt. I believe these financial institutions have behaved
\nirresponsibly, and in so doing have contributed to the crisis.
\nThey need to take a good hard look at the kind of people they
\nwere supporting and why they were supporting them.<\/p>\n
The task ahead is a difficult one but certainly not
\ninsurmountable. This is not a time for gimmicks or short-term
\nsolutions. We must put the long-term economic development of the
\ncountry ahead of short-term political interest. Progress toward
\nbetter governance is actually being made, particularly in the
\nfinancial sector. We must remember that it is a process rather
\nthan an event and it will take time to get there but I am
\nconfident that we will.<\/p>\n
Indonesia is still a country with an abundance of natural and
\nhuman resources and a huge potential market. If we do the right
\nthings, local and foreign investment will return to Indonesia and
\ndevelop these resources.<\/p>",
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