FOR GENERAL ISSUE: Good Corporate Governance
FOR GENERAL ISSUE: Good Corporate Governance
;JP; ANPAf..r.. 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.