Corporate governance in Indonesia

This is the first of two articles by Mark Baird, the World Bank's country director, based on a presentation on April 25 at the conference on freedom of economic information, held here among others by the LP3ES research institute in cooperation with the Washington-based Center for International Private Enterprise.

JAKARTA: Although the need for good corporate governance has been acknowledged since corporations were first created, an awareness of this need has grown rapidly around the world in recent years.

Initiatives for improvement started to accelerate in the U.S. in the early 1990s. Since then the Organization for Economic Cooperation and Development (OECD) has published principles for good corporate governance and the World Bank has worked in partnership with the OECD in disseminating these principles.

Poor corporate governance is widely regarded as one of the main factors that first brought on the crisis in Indonesia and then contributed to its severity and length.

Investor confidence was undermined during the crisis and remains weak, not just in certain companies but in the entire Indonesian market.

The domestic and international financial markets are still reacting negatively, especially to the lack of transparency in the Indonesian banking and corporate sectors.

This lack of transparency is no longer acceptable in the world of today -- a world in which the leap in information technology has made it possible, via e-mail and the Internet, to gain access to information more quickly, and from more diverse sources, than ever before.

The crisis has shown us that it is no longer possible for companies, institutions or countries to do whatever they like in isolation without attracting penalties.

No company, institution or country can afford to risk the dispassionate logic of the marketplace by pursuing policies or strategies that lead to, say, the wholesale withdrawal of investor capital, as we saw here during the crisis, or in the multinational corporations that have had to respond to pressures for change by consumers and investors alike.

Investment decisions are based on information, and the quicker and more reliable the information, the less likely it is that decisions will be made on emotion and herd instinct.

It is possible for the Dow to rise and fall by 500 points without setting off global panic. This is in part due to the trust that investors on Wall Street have that the information underpinning their decisions is accurate and transparent, and that they get it at the same time as everyone else.

This was not true of the Asian crisis, when the devaluation of the Thai baht set off investor reactions of panic and flight in response to growing knowledge about the deep cracks in the financial sectors.

And it certainly was not true in Indonesia, where you had a situation in which, the more investors -- foreign and domestic -- learned about the problems within the economy, the bigger the crisis in confidence grew.

Although there have recently been signs of an incipient economic recovery in Indonesia this should not be grounds for complacency.

Unless the governance problems affecting Indonesia's corporate and banking sectors are resolved, the recovery will be limited and Indonesia's population, especially the poor, will remain highly vulnerable to future crises.

There are some real opportunities, however, that we can look to in helping shape recovery, and in improving corporate governance -- one of these is the role that the media has already played and can increasingly play in fostering greater transparency, and holding both government and the business sector accountable to the public.

The press have played a critical role in the reform process of the past years, and the tremendous political transformation Indonesia has undergone.

This is a country that has achieved the triumph of securing a democratically-elected President, of empowering a free press, and of beginning a campaign against a system of corruption that is as bad as any in the world today.

What could have been achieved in this new environment had the media not been free to report on the government, on politics, on corruption, collusion and nepotism?

The media here have been a catalyst for change; they have challenged successive governments -- and institutions such as the House of Representatives, the World Bank, and the International Monetary Fund (IMF), as well as the private sector -- to be increasingly open and accountable for their actions.

Through their words and their actions, the press have done a lot to promote transparency in government, businesses, and civil society; have broadened the debate on public policy, and have played a key role in exposing, and perhaps more critically, following-up on allegations of corruption, such as you saw with Bank Bali and the social safety net programs.

The press must continue to play this unique role -- both in building awareness and knowledge of public and private sector practices -- and in building expertise, experience, and professionalism among their colleagues to establish over the long-term a well-educated press corps able to hold public and private sector institutions -- as well as itself -- accountable to standards of transparency and responsibility.

The new openness and transparency in Indonesia has also opened the door to rapid improvements in corporate governance and the challenge now is to seize the opportunity, to achieve important gains and lock them in.

With the recent launch in Indonesia of the Partnership for Governance Reform the stage is now set for a concerted effort to support corporate governance reform in Indonesia.