Good corporate governance and culture: Indonesia's challenge

Good corporate governance and culture: Indonesia's challenge

Eric Hallett, Jakarta

There has been much recent debate over how universal the
policies of good corporate governance are across cultures
(transparency and disclosure, ethical decision-making,
shareholder rights, proper risk management, appropriate executive
remuneration, stakeholder interests, etc.).

Many suggest that the policies set forth by the Organization
for Economic Co-operation and Development (OECD) for good
corporate governance apply everywhere -- good business is good
business no matter where your are. Others insist that cultural
values influence what is considered good business and that "best
business practices" can mean different things in different
places.

The element of culture plays an important role in how we do
business and what we consider good and bad conduct. And it's
this difference in perception about what is good and bad based on
cultural values that divides business leaders between different
definitions of best business practices. In many eastern
countries, for example, the selection of board members is still
heavily influenced by family relationships and informal network
ties.

This makes good business sense in these countries and it
contributes to the ongoing interests of the companies. However,
policymakers in the west frown on this type of behavior by
claiming that appointing family and friends to the board of
directors is a blatant display of favoritism and bias and will
lead to unavoidable conflicts of interest.

Can we reconcile the two viewpoints? Is it wise to do so?
One approach to good corporate governance across cultures might
be found somewhere between the two. There are certain business
practices which universally benefit companies around the world,
and there are other culturally-specific practices which benefit
companies that must adhere to locally accepted values in order to
prosper.

In fact, allowance is currently made by the OECD for the
"divergence" of culturally-specific practices and systems as long
as these practices and systems lead to the overall objective of
good corporate governance which is the long-term welfare of the
company's shareholders and stakeholders.

At the same time the OECD also recommends that divergent
practices and systems eventually be minimized or eliminated. By
doing this the OECD is taking the side of the universalists even
though it is currently allowing for exceptions. It is
encouraging companies with divergent practices to move along the
path to universal acceptance of its "best business practices".

This is where the challenge lies for Indonesia and other
countries that have long-standing, culturally-based business
practices which lie outside of those that are recommended by the
OECD. It is a challenge because the practices are rooted in
cultural values that are extremely difficult to change, if they
are changed at all.

Resistance to cultural change is part of human nature. We
like to keep things predictable and running smoothly even though
we know there are negative long-term consequences for doing so.
Change brings with it a sense of short-term discomfort, pain,
even loss. Sometimes, waiting for long-term consequences seems
easier to contend with than dealing immediately with short-term
consequences. This is the psychological predicament that all
companies face when struggling with change.

This resistance should not get in the way of making immediate,
informed decisions about the extent to which our companies are
willing to accept and uphold best business practices as
stipulated by the OECD.

When evaluating the usefulness of divergent practices, and
whether we should maintain them or not, we must avoid the
psychological trap of preferring divergent practices over
generally accepted practices because "that's the way we've always
done it".

Leaders resistant to healthy change may also defer to
prevailing practices because the rewards are immediate and the
risk of change is minimized. This is the power of culture
speaking.

Instead, our companies must grapple with how they justify
divergent practices and whether that justification is legitimate.
Besides the example given above, consider the practice of paying
higher prices for raw materials from suppliers who are connected
to an informal network, instead of receiving open bids and paying
the lowest price for the same materials. Is this practice
legitimate? Who loses or gains if it the practice is changed?
These are the types of questions we must consider among others.

Our companies must also consider the consequences, both short-
term and long-term, of maintaining or eliminating divergent
practices. If divergent practices are maintained, future
investors and customers world-wide may get the impression that
we're not serious about good corporate governance. On the other
hand, if we eliminate divergent practices we upset comfortable
and culturally-accepted ways of doing business which bring their
own rewards and may even be necessary for sustaining business in
the short-term.

Good corporate governance is needed and best business
practices as set forth by the OECD give us a fundamental approach
to achieving this. It is up to our business leaders to decide
how to meet the challenge of integrating these policies into very
unique corporate cultures within a very unique national culture,
or to decide how to meet the challenge of not integrating them.

The writer is Head of the Business English Center at Prasetiya
Mulya Business School. He lectures on International Comparative
Management topics and can be reached at eric@pmulya.ac.id