FOR GENERAL ISSUE: Good Corporate Governance
FOR GENERAL ISSUE: Good Corporate Governance
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Corporate-govt-practices
Good Corporate Governance:
Costly at first but worth it in the long run
Hadi Cahyadi
Contributor
Jakarta
During a seminar on corporate governance in Jakarta recently,
one of the participants asked whether corporate governance was
really required by a company, or whether it was only another
trick by consultants to get assignments after all the brouhaha
about total quality management (TQM), BPR and ISO 9000?
And the other interesting question was whether corporate
governance is another trick of the West to dictate the way we do
business, while at the same time they have their own high-profile
scandals such as Enron, WorldCom, Tyco, Xerox, Adelphia and
Global Crossing.
It would seem that this question in many ways reflects the
general attitude in Indonesia, which has still a long way to go
as far as corporate governance is concerned.
The term "good corporate governance" was first used in the
Cadbury Report on Good Corporate Governance, which was produced
in the UK by a committee chaired by Sir Adrian Cadbury. This
committee was charged with the task of producing a "Code of Best
Practice" for public companies in Britain, after which the use of
the term "good corporate governance" became almost trendy.
The report contained guidelines for the realization of
corporate governance, so as to provide explanations and
clarification on the respective roles of shareholders, directors
and auditors. Cadbury also urged shareholders, particularly
institutional shareholders, to play a greater role in the
implementation of corporate governance.
When the economic crisis assailed Indonesia, much of the blame
was placed fairly and squarely at the door of corruption,
collusion and nepotism, known by its Indonesian acronym KKN.
Besides blaming corruption, collusion and nepotism for the
crisis, many people also castigated the manner in which corporate
governance was being implemented by companies in Indonesia.
Overseas investors, in fact, regarded the corporate governance
of Indonesian companies as being so bad that it was an impediment
to investment.
Pursuant to an International Monetary Fund (IMF)
recommendation, the Indonesian government established the
National Corporate Governance Committee in 2000. This committee
issued a Code of Best Practice in 2001 as a guide for the
implementation of good corporate governance by companies in
Indonesia.
The Capital Markets Supervisory Board (Bapepam) and the
Jakarta Stock Exchange (JSX) have been unceasing in urging public
companies to ensure the implementation of good corporate
governance.
One way in which this could be brought about would be to
require public companies to establish audit committees and
appoint independent commissioners by the end of this year.
However, Indonesia is not alone in its efforts to bring about
good corporate governance. Russia, Italy, Kenya, Malaysia, Japan
and Singapore are all in the process of updating their statutory
arrangements and the guidelines that support the implementation
of good corporate governance.
In fact, public companies in Malaysia and Australia will be
required to outline their implementation of good corporate
governance in their annual reports, both on matters that comply
with the relevant codes and matters that deviate from these
codes.
GCG guidelines
The corporate governance guidelines drawn up by the National
Committee were completed in March 2001. These guidelines are
intended to maximize the shareholder value of companies through
an improved application of the principles of transparency,
accountability, trustworthiness, responsibility and equity. The
desired end result of the implementation of good corporate
governance is to increase the level of competitiveness of
companies.
The new guidelines also support the management of companies in
a professional, transparent and efficient manner. In addition,
they also stress the importance of companies improving the
function and autonomy of the board of commissioners, board of
directors and the shareholders general meeting.
The Indonesian corporate governance code also strives to
encourage adherence to moral norms and compliance with the laws
and regulations in effect, in respect to the making of decisions
and undertaking of actions on the part of the board of
commissioners and board of directors. The guidelines also attempt
to encourage a sense of social responsibility in companies in
respect to their shareholders and the protection of the
environment surrounding the company.
The guidelines specify in detail the rights of shareholders
that must be protected and upheld, the obligations and
liabilities of the members of the board of commissioners and the
board of directors, the audit system employed (as well as
recommending that audit committees be established), the role and
function of the company secretary, the rights of interested
parties (stakeholders).
They also specify the requirements in respect to openness,
confidentiality, insider information, corporate ethics and the
issue of corruption, unauthorized political donations, compliance
with occupational health and safety laws, environmental
conservation, equal employment opportunities irrespective of
ethnic background, religion, sex, age, etc.
If we look more closely at these good corporate governance
guidelines, we will see that the appraisal of a company director
should not be limited to performance, but also should cover the
question of compliance with the laws and the upholding of a high
level of business ethics.
Although it is not mandatory that companies adopt the good
corporate governance guidelines produced by the National
Committee, significant benefits would accrue if these guidelines
were to be implemented. These may be summarized as follows:
* Clear lines of authority for the directors and commissioners
are established so that each of them know their duties and
responsibilities.
* The appointment of competent directors and commissioners
who, through their individual abilities, will be capable of
taking decisions that can be accounted for to the shareholders
(whether controlling or minority), and other interested parties
(stakeholders).
* The presence of independent commissioners who, in essence,
are intended to represent the minority shareholders. This is
predicated on the upholding of fairness and equity in decision-
making by the board of directors and board of commissioners.
* The accountable appointment of independent commissioners,
who should be really "independent". The best practice of
selection should go through a selection panel, which represent
all stakeholders such as minority shareholders, creditors,
regulators and employees.
* The introduction of performance appraisals for the board of
directors and board of commissioners, so as to ensure greater
balance between the performance of directors and commissioners
and their remuneration.
* The establishment of various committees, such as an audit
committee to shadow the board of commissioners and to work in
tandem with auditors, whether internal or external, in the
exercise of the oversight function.
* Ensuring transparency in the information that must be
furnished to the stock exchange.
* A description in the annual report concerning the
implementation of good corporate governance
* Satisfactory risk management so that internal policies and
controls are properly implemented so as to reduce business risks.
* The existence of a code of ethics that regulates the
relationship between company employees and third parties, such as
suppliers. This will allow the code to be properly implemented in
the company. If certain sections of the company are regarded as
lucrative and certain sections not so, this means that the
company has yet to successfully apply good corporate governance.
Through the management of a company with the safeguards
outlined above set in place, the company and the stakeholders
will benefit both directly and indirectly. The employees will
benefit as their jobs will be guaranteed. The shareholders will
benefit as they can expect the value of their investment to grow.
Suppliers will be assured that payments will be made on time.
Creditors will be reassured as the business risks of the company
will be capable of being managed.
Investors will even purchase the company's shares at a
premium, as they have confidence that the company is being
managed by honest and competent directors. Both the central and
regional governments will receive taxes and will have a partner
in development in the form of the company. Consumers will be
satisfied and will trust in the company's products and services,
as these are first class.
In brief, in addition to better performance on the part of the
company, its shares will become more sought after, and higher
priced, as investors will have confidence that the fate of the
company is in the hands of competent professionals. Accordingly,
creditors will reduce the cost of capital as the business risks
will have diminished. -- The writer is a partner in the
Management Consulting & Financial Advisory Services (McFAS)
Division of PB & Co.