Good Corporate Governance

A.B. Susanto, Managing Partner, The Jakarta Consulting Group

The Enron scandal has caught the whole world by surprise. So, it would appear, such scandals can still happen in developed country like the United States.

The White House has become the center of public attention for its alleged role in the financial fiasco. The same goes for the highly prestigious international rating agency Standard & Poor's, and the company's own auditor Anderson, which both failed to detect the irregularities.

In Indonesia, the reform drive has opened our eyes to the fact that many aspects of corporate governance have been implemented without transparency. As a consequence, many companies have incurred serious financial problems causing the state to shoulder a burden of billions of rupiah in its state budget.

This is why good corporate governance is a must for corporations -- blunders in managing a business entity will harm not only the shareholders but also the public and the state as stakeholders.

Basically, corporate governance deals with an improvement in corporate performance through supervision or monitoring of managerial performance, and at the same time it is needed to ensure management accountability to both shareholders and stakeholders.

Good corporate governance also constitutes an effort to motivate the management to improve effectiveness and to control its behavior so that it works for the interests of shareholders and stakeholders.

In general, the concept covers four basic principles, namely fairness, transparency, accountability and responsibility. In essence, corporate governance is the process and structure of various activities designed to ensure that corporate performance matches what stakeholders expect.

In practice, corporate governance focuses on issues related to accountability even though various other aspects that can further corporate achievement should also be taken into account in terms of their implementation. It is also important to maintain harmony between corporate objectives and the purpose of accountability.

Among the variety of mechanisms that can be developed to support the creation of good corporate governance are: * Executive remuneration. There is an assumption that the remuneration paid to an executive correlates to his performance. * Audit Committee. This committee is an independent body which is expected to give input to the corporate council in monitoring corporate progress. * Internal Control. Corporate management should have a direct controlling instrument to monitor various important developments in the company so that various early warning signals about corporate conditions can be quickly responded to. * Shareholders/investors, particularly the institutional ones, have a major interest in managing the company, a reason why they pay close attention to the company's development.

Last but not least, here is a message to ponder:"To make Good Corporate Governance work, namely to make Corporate Directors behave in the interests of the stakeholders/shareholders, we have to give them authority to develop the organization while treating them with all due respect."