Between politics and business: Boardroom decision making in state‐owned Indonesian enterprises

• Author: Indri Dwi Apriliyanti,Trond Randøy
• DOI: http://doi.org/10.1111/corg.12270
• Published date: 01 May 2019
• Date: 01 May 2019

ORIGINAL ARTICLE

Between politics and business: Boardroom decision making in

state‐owned Indonesian enterprises

Indri Dwi Apriliyanti

1,2

|Trond Randøy

1

1

School of Business and Law, University of

Agder, Kristiansand, Norway

2

Faculty of Social and Political Sciences,

Gadjah Mada University, Yogyakarta,

Indonesia

Correspondence

Indri Dwi Apriliyanti, School of Business and

Law, University of Agder, Gimlemoen 25,

Kristiansand 4630, Norway.

Email: indri.apriliyanti@uia.no

Abstract

Research Question/Issue: A significant part of the world's economy is controlled by

state‐owned enterprises, and there is a lack of research on how the interplay between

politics and business plays out in the boardroom. We address this issue by analyzing

boardrooms' decision outcomes as they relate to the role of boardroom power distri-

bution, members' motivation, and decision‐making approach.

Research Findings/Insights: On the basis of information from a sample of 22 state‐

owned Indonesian enterprises, we found that a decision outcome in a boardroom is

influenced by three factors: the motivation and decision‐making approach of individ-

ual board members and the distribution of power in the boardroom. We also found

that, in several cases, board members are powerless decision makers, as the

decision‐making process in the boardroom is controlled by the government and

politicians.

Theoretical/Academic Implications: This study contributes to the understanding of

the inner working processes in emerging‐market boardrooms, and we build a theory‐

driven typology of boards' decision outcomes.

Practitioner/Policy Implications: This paper highlights the nature of political inter-

actions within the boards of state‐owned enterprises, and we recommend that

state‐owned enterprises seek board members who are knowledgeable and rationally

motivated, as well as seek a (more) equal power distribution among board members.

Politicking and political interference can lower the quality of boards' decisions.

KEYWORDS

Corporate governance, board processes, corporate governance theories, decision making, state‐

owned enterprises

1|INTRODUCTION

Past research highlights how board studies commonly ignore, or over-

simplify, the impact of the distribution of power and conflicts of

interest in the boardroom (McNulty & Pettigrew, 1999; Ravasi &

Zattoni, 2006). We attempt to deepen the theoretical understanding

of board dynamics in highly politically infused environments, by

conducting grounded research on the behavior and decisions of super-

visory boards in state‐owned enterprises (SOEs). Furthermore, we

argue that “politics and power”issues are particularly pertinent in

SOEs in emerging markets (Papadakis, Lioukas, & Chambers, 1998),

which generally have less transparency (to other stakeholders such

as the government audit office, regulators, minority shareholders,

and citizens) and weaker institutions (Alon & Hageman, 2017) over-

seeing their conduct (such as legal institutions and a highly indepen-

dent bureaucracy).

This research is motivated by the fact that SOEs play a significant

role worldwide (Economist, 2014). There are eight countries (China,

the United Arab Emirates, Russia, Indonesia, Malaysia, Saudi Arabia,

India, and Brazil) with a particularly high share of SOEs, and these

Received: 6 June 2017 Revised: 12 August 2018 Accepted: 3 December 2018

DOI: 10.1111/corg.12270

166 © 2018 John Wiley & Sons Ltd Corp Govern Int Rev. 2019;27:166–185.wileyonlinelibrary.com/journal/corg

countries collectively account for more than 20% of world trade

(Kowalski, Büge, Sztajerowska, & Egeland, 2013). From a corporate

governance and transparency viewpoint, we find it particularly inter-

esting to address boards of SOEs, because Clarke, Cull, and Shirley

(2005) argue that politicians and bureaucrats may use SOEs to pursue

their personal and political goals.

Specifically, we argue that Indonesia provides a highly interesting

environment for studying corporate state ownership, given the histor-

ical importance of SOEs in this economy. The global relevance of this

context is motivated by the fact that Indonesia is presently the world's

10th largest economy in terms of purchasing power, the largest

economy in Southeast Asia (World Bank, 2017), and in 2050 is

expected to be the fourth largest economy in the world (PWC,

2017). The recently elected administration of President Joko Widodo

has placed an emphasis on transparency and democratic accountabil-

ity (World Bank, 2016), putting more pressure on SOEs to succeed

in a fair marketplace. Thus, we expect that these new economic

demands on state ownership will impact decision making in SOE

boardrooms.

This paper responds to the call of Bailey and Peck (2013), Muller‐

Kahle and Lewellyn (2011), Machold, Huse, Minichilli, and Nordqvist

(2011), and Zona and Zattoni (2007) for research that will open

the “black box”of boardroom decision making and the actual behavior

of board members in the boardroom. Furthermore, we provide

insights into decision‐making processes based on qualitative data,

complementing the existing board literature dominated by quantita-

tive and economic studies (Bailey & Peck, 2013; van Ees, Gabrielsson,

& Huse, 2009; Zona & Zattoni, 2007). Specifically, this paper

addresses “a need to get closer to boards and directors to collect pri-

mary data about processes of contribution, power, and influence”

(McNulty & Pettigrew, 1999, p. 52). Hambrick, Werder, and Zajac

(2008) argue that the absence of analysis of power dynamics among

board members is one of the reasons demographic studies of board

composition have commonly failed to produce strong and consistent

results. Although other studies have focused on how decision making

in boardrooms is influenced by decision‐making style (Bailey & Peck,

2013; Dean & Sharfman, 1993), in this study, we also try to capture

the distribution of power within the supervisory board.

Past research points out that boards are privileged closed groups

that are difficult to access (Leblanc & Schwartz, 2007), particularly in

emerging markets with a history of weak transparency and little dis-

closure. To be able to perform this study, we leveraged industry (per-

sonal) and university (institutional) connections to gain access to a

sample of SOEs' board members. We argue that by focusing on super-

visory boards in state‐owned Indonesian enterprises, we can expect to

get unique insights into the “politics and business”interaction. In the

Indonesian context, such positions are infamously known to be distrib-

uted to political party members and the President's supporters

(Kompas, 2015; Tempo, 2015), and their selection is typically less

transparent and more political compared with the selection of chief

executive officers (CEOs) and other top executives. The research

question we address is how decisions in the boardroom are influenced

by (a) power distribution, (b) members' motivation, and (c) the board's

decision‐making approach. We attempt to analyze how the distribu-

tion of power among board members and their decision‐making style,

as well as their motivation, influence decision‐making processes in the

boardroom.

The paper is organized as follows. Section 2 provides the theoret-

ical foundations for studying board power and the decision‐making

process. Section 2.3 demonstrates corporate governance practices in

Indonesia. Section 3 describes research methods. In Section 4, we pro-

vide qualitative evidence of how supervisory boards in SOEs function

as institutions in Indonesia and discuss our findings. In Section 5, we

elaborate on the theoretical and practical contributions of those find-

ings, their limitations and a future research agenda.

2|THEORETICAL FOUNDATIONS

Our starting point is based on the differentiation between rational and

political decision making. In the literature, these terms are employed

very loosely and synonymously. One may use the term “rational”to

describe how an individual creates a decision that benefits the firm,

although empirical data show that a skilled politician may use a ratio-

nal approach to justify self‐serving decisions (Dean & Sharfman, 1993).

One group of researchers defines rational/political as approaches used

by an individual in decision making (Bailey & Peck, 2013; Dean &

Sharfman, 1993). A second group defines rational/political as an indi-

vidual's goals or motives in engaging in decision making (Allen et al.,

1979). In this paper, we combine both of these definitions of “rational”

and “political,”that is, both as an approach and as a motive, to get a

clearer understanding of the decision outcomes that occur in a

boardroom.

2.1 |Power, motivation, decision‐making approach,

and decision outcomes

Figure 1 provides the conceptual framework of our paper. It shows

how boardroom decision making can be broken down into several

steps: (a) individual board members assess their power, (b) individual

board members identify their motive in a particular decision, (c) the

assessment of power and the identification of motive impact the

decision‐making approach of individual board members, (d) individual

board members may have different motives and approaches, (e) the

different motive and approach of an individual board member impact

the decision‐making process of the whole board, and (f) the board

eventually makes a decision that reflects a motive and an approach

that are either rational or political or both rational and political or nei-

ther rational nor political,

1

and at the same time, this decision is influ-

enced by the distribution of power in the boardroom.

Our conceptual model is based on Pfeffer (1992), who considers

how a group member assesses and confronts a given situation before

influencing a decision‐making process. According to Pfeffer (1992), in

the first stage of situation assessment, a group member chooses the

goal he or she wants to accomplish. Motives are the causes that

induce a group member to select a certain goal (Simon, 1964). We

argue that rational motivation is oriented toward achieving organiza-

tional goals (Argyris, 1973; Simon, 1957). On the other hand, political

motivation takes the form of pursuit of self‐interest or the group's

interest (Porter, Allen, & Angle, 1981), with the aim of increasing one

APRILIYANTI AND RANDØY 167