Corporate governance: Problems and challenges

Corporate governance: Problems and challenges

This is the second of two articles on good corporate
governance prepared by Sauri Hasibuan, business development
manager of PT Airindo Bersih Jaya.

JAKARTA (JP): To carry out good governance is difficult,
especially in a country where governance by the personal whims of
a tyrant is a rule and not an exception.

"The corrupt culture of governance has not changed and I would
argue that in the present government, the hanky-panky has even
got worse," notes Rizal Ramli, director of Jakarta-based economic
advisory Econit, as quoted recently by Far Eastern Economic
Review.

Clearly there is a need to establish a coherent policy for
both public and private sectors and translate the policy into
clear operational objectives. It is also important to note that
creation of this policy must be consistent with promoting the
supremacy of the rule of law. In doing so, the public sector must
change its attitude from all-knowing entity to one that
continuously learns throughout time. Cohesive policy can be best
adopted from wide international experience (for private and
public sectors), although each country/company has it own set of
issues that need to be addressed carefully. Several conclusions
can, however, be made on the key points leading to a better
governance.

It is important for international firms to be very selective
in choosing partners, especially in finding a partner whose
qualifications correspond to each particular company's objective
in the region. Partner selection is crucial because a foreign
firm's strategic success in a country depends on the capability
of the partner and its willingness to cooperate.

Partner selection is difficult especially in the case of
Thames Water International (TWI), where available information is
sketchy and unsystematic. For TWI, it was very much like a take
it or leave it situation since the surest route to Indonesia's
major infrastructure project was through the political connection
of people in power and their cronies. Since the New Order regime
is no longer in power, let's assume that the market operates
under perfect conditions. For a company to enter a new
international market, it is a good idea to deploy substantial
resources primarily to collect information on potential
candidates for partnership and acquisition. Many international
firms do not usually devote a serious amount of time and
resources to partner selection. In Indonesia for example,
business contacts can be easily initiated. Unfortunately, these
first arbitrary contacts are often the parties with whom the
western company will choose to negotiate.

By having KPA as a local partner, TWI benefits tremendously in
many aspects -- such as an assurance of cooperation from other
government agencies. To some extent, of course, KPA might have
been involved with a western company before. The existence of
such a relationship, especially when accompanied by personal
friendships, may have prevented TWI from searching for
alternative contacts or from raising critical questions, since
this would have hurt and endangered the existing link. Intensive
communication must be established not only with the owner or top
managers of the firm but also with the operating staff on the
front line. Not all balance sheets carry the signatures of
internationally recognized auditors, especially in Indonesia
where there are many tycoons with cross-share holdings, a mixture
of publicly listed and privately held companies that makes
interpretation of data very difficult.

Attention should be paid to the vision of a potential partner,
especially the compatibility of long-term objectives or motives.
TWI should fully explore the degree of a partner's commitment in
the long run. Several important questions can be used as
guidelines to assess a partner's commitment: Are the partners
willing and able to contribute to the critical resources, assets
and competencies needed for competitive success? Do they share
the same business logic? Is the partner successful enough in its
home country? Do it have good contacts with the authorities? Is
it free from nepotism and negative political reputation? If it is
not free from nepotism, what will be the public's perception of
the venture? Is it going to harm the company's image in the long
run? What about the political vision in the country? Is the
partner only willing to play a passive role? (Only act as a front
man who represents the venture but stays passively in the
background and does not influence any important decisions.) Is
there going to be a serious cross-cultural difference that will
lead to numerous problems in the future?

One could add more criteria to the list, but this is probably
enough to indicate that good partners are hard to find. If they
exist, they may already be partnering other firms. A classic
mistake is likely to occur when an overly optimistic evaluation
is made concerning what the partner is likely to bring to the
joint venture. This happens when each side tends to harbor
unrealistic expectations of the other.

Indonesia is now in a transitional phase where promoting the
rule of law and good governance is a must if the country is to
survive future global competition. In so doing, it is important
to create a system or mechanism that will limit any misconduct on
the part of public officials. There is no short route to create
economies and societies that are open, transparent and
accountable. Lasting results will take years to achieve and
sustained efforts must be on a scale commensurate with the
problems. The complexity to create this condition should not be
taken as an excuse for doing nothing. Since the collapse of the
New Order regime, public reaction to officials' misconduct has
probably never been stronger, partly because it is increasingly
clear that the public is the big loser if officials' wrongdoings
continue. Several steps have been identified to create better
transparency, accountability and the rule of law.

* There is a clear need to involve multilateral agencies in
projects' supervisory boards to monitor large-scale
infrastructure projects. Independent business advisory groups and
civil society such as non-governmental organizations (NGOs) can
be included to monitor the bid evaluation and the selection of a
competent bidder.

* The role of the media in curbing malfeasance is also crucial.
This is not to suggest that the media may take over the
government's responsibility. At the very least, the media can
help the government to effectively help society monitor big
projects. The public can effectively pressure the media to play a
role of monitoring.

* The public should have access to important project information
all the way to the grassroots level.

* Nationwide notification of bidders and officials who engage in
bribery should be done through mass media.

* The government must provide appropriate protection for
witnesses (and their families) in corruption cases and other
cases involving other offenses.

* Organizations within civil society, such as NGOs, must practice
the same standards of transparency and accountability that they
expect from the government.

* The government should conduct broad-based participatory
training/workshops to build its accountability.

Essentially, for projects to come into realization there must
be a mutual understanding by every party involved. In addition,
the role of the government is pivotal to a project's successful
consummation.

The government must give political commitment to projects.
There must be an acceptance of the principles of privatization
due to the fact that equity investors require a return on capital
that satisfies their shareholders, and that the international
financiers want a reasonably risk-reward profile. The parties
involved also want to see that the political dimensions are
managed in the long term because all these projects require a
long-term commitment by all involved.