Transparency and corporate governance in RI
Transparency and corporate governance in RI
This is the second of two articles by Mark Baird, the World
Bank's country director, based on a presentation on April 25 at
the conference on freedom of economic information, held here
among others by the LP3ES research group in cooperation with the
Washington-based Center for International Private Enterprise.
JAKARTA: The underlying condition of the Indonesian corporate
and financial sectors at the onset of the crisis is well-known:
banks were exposed to excessive levels of unhedged foreign debt;
credit allocation by banks to companies showed little regard for
future debt servicing; companies were highly leveraged, with
substantial unhedged short-term foreign debt; and profitability
was low.
External discipline through competition was muted by entry
barriers and legal monopolies, and the threat of hostile
takeovers of under-performing companies was minimal in the face
of strongly entrenched insiders.
Poor corporate governance was a major contributor to this
state of affairs and in Indonesia has had the following
characteristics:
* Corporate governance has been seen primarily as a compliance
issue rather than a means of enhancing corporate performance.
* In common with many other parts of Asia, Indonesian
corporates are predominantly family-owned, even when publicly
listed.
* Fraud and insider transactions have been common, disclosure
has been weak and the disclosure and disciplinary mechanisms of
the capital market have been ineffective.
* Minority shareholders and other stakeholders have had few
means of protecting themselves against majority shareholder
abuses. Although mechanisms for addressing abuses do exist in
Indonesian Law they are little used and the weak judiciary has
limited their effectiveness.
* Managers and directors have been largely immune from
stakeholder accountability.
* Banks have been ineffective monitors of corporate managers.
* A weak bankruptcy and judicial system has left creditors
with little leverage over their debtors.
* State enterprises have been subject to significant
intervention by government in business decisions, and SOE
performance monitoring has been almost non-existent.
* The role of the regulators, the Capital Market Supervisory
Agency (BAPEPAM) and the JSX has not been strong enough to
compensate for the weak judiciary .
There have been recent positive steps to begin dealing with
these weaknesses:
* A number of private business organizations and non-
government organizations such as the Indonesia Netherlands
Association and Transparency International have begun initiatives
to support improved transparency and corporate governance.
* A broadly based National Committee on Corporate Governance
(NCCG) was created in late 1999. This committee comprises some 20
members from the public and private sectors representing the
legal and accounting professions, the banks, state owned
enterprises, private corporates, the Stock Exchange and important
Government agencies such as BAPEPAM and the Ministry of Law and
Legislation.
* The NCCG has produced a draft of a Code of Good Corporate
Governance that addresses issues such as shareholders rights and
responsibilities, the functions and composition of the Boards of
Commissioners and the Boards of Directors, internal and external
audit, the role of the corporate secretary, stakeholder rights
and stakeholder participation and monitoring of management
decisions, timely detailed and accurate disclosure of management
and financial information.
It also addresses confidentiality of information that can
affect share prices if it is leaked before it is officially made
public, and restrictions on the use of inside information for
personal gain.
Corporate governance reform in Indonesia is still in its
infancy and much remains to be done. It will be years before the
necessary reforms are fully effective but there are some quick
wins to be made and a need now for immediate action to get the
ball rolling so that it can gain momentum.
Firstly urgent measures are needed to improve the business
environment in general, not only for large corporates but also
for small and medium enterprises that have the potential to be a
major productive force in the economy as well as major sources of
employment and income. These measures include:
* Promote better competition and create the new competition
agency provided for in the 1999 Law on Competition.
* Start taking steps to reduce the burden of excessive
government regulation, with its associated burden of corruption,
on the business sector.
* Strengthen the rule of law and the judicial system, in
particular the commercial court as it affects the insolvency and
bankruptcy mechanisms, property rights and contract enforcement.
* Accelerate banking and corporate restructuring, especially
by means of debt equity conversions. An important effect of this
will be to dilute the concentration of corporate ownership and
bring fresh management into the banking and corporate sectors.
Some specific measures needed to improve corporate governance
include:
* Improve the requirements and the frequency of disclosure and
publication of financial information to bring them into line with
best international practice, especially from listed companies,
banks and other companies raising money from the public.
* Improve disclosure of related party transactions and improve
rules and enforcement against the use of inside information.
* Improve standards of accounting and audit in line with
international norms and provide more training for accountants and
auditors.
* Strengthen rules governing the responsibilities and
accountabilities of supervisory boards, boards of directors and
internal and external auditors.
* Improve the quality of supervisory boards and boards of
directors by increasing the required minimum number of outsiders
on these boards, set criteria for the selection of commissioners
and directors, and provide them with training as needed.
* Strengthen all aspects of BAPEPAM but especially its
capacity to monitor and enforce compliance with rules on public
disclosure.
* Fully implement the company registry, train its
administrators, publicize its availability and provide training
in its use.
* Strengthen minority shareholder rights by improving rules on
listing and securities transfer.
Next steps would include:
* Explore the potential for the use of the public/private
National Committee on Corporate Governance (NCCG) as a forum for
all major stakeholders to discuss and plan corporate governance
reforms.
* A first step by the NCCG should be to work to develop a real
consensus among its members around its recently drafted Code on
Good Corporate Governance.
* Government should move rapidly to implement the measures
within its own control, such as improving existing regulations,
implementing new regulations, and strengthening public
institutions such as BAPEPAM, responsible for encouraging and
enforcing good corporate governance.
* Private initiatives and self regulation should also be
encouraged. A good example is the recently announced corporate
governance agreement between the Indonesia Netherlands
Association and a number of Indonesian professional associations
and self-regulatory organizations. KADIN has also announced a
campaign to promote improved corporate governance among its
members.
* There is a need for broad programs using the media as well
as public meetings, conferences and seminars to develop public
awareness of the need for transparency and improvement in the
governance structures and mechanisms of the banking and corporate
sectors. The message is that better corporate governance and
transparency can bring benefits to all; the general population,
customers, suppliers, employees, investors, shareholders and
management alike.
* Shareholder activism should be encouraged as a means of
enforcing good governance on public corporations. Such activism
has been a major driving force for change in the United States
and elsewhere.
* Non-government organizations and other "watchdogs" should be
encouraged to act as pressure groups for reform.