Corporate governance in Indonesia

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.