Corporate Governance and State-owned Enterprises: A Study of Indonesia?s Code of Corporate Governance

• Author: Miko Kamal
• Position: PhD Candidate in Business Law, Macquarie University
• Pages: 206-224

Journal of International Commercial Law and Technology Vol. 5, I ssue 4 (2010)

206

Corporate Governance and State-owned Enterprises:

A Study of Indonesia’s Code of Corporate Governance

Miko Kamal

PhD Candidate in Business Law, Macquarie University

miko.kamal@mq.edu.au

Abstract. In Indonesia, the concept of corporate governance was formally introduced in 1999 when

the government established the National Committee on Corporate Governance (NCCG). Indonesia

then created its national code of corporate governance in 2000 through the NCCG, later revised in

2006. This code is a reference poin t for all companies in Indonesia, including state-owned

enterprises (SOEs) that are regulated under Law No. 19 of 2003. According to the law, there are two

types of SOEs: general companies and limited liability companies. The former are SOEs that have

tasks to run social purposes. The latter are business-oriented SOEs, comprise listed companies or

companies where shares are fragmented and non-listed companies (pure SOEs), where the

government is representative of ordi nary public as shareholder. Consequently, In donesia’s code of

good corporate governance applies also to pure SOEs. By un dertaking a document analysis method,

the study attempts t o an swer a question as to what extent Indonesia’s concept of corporate

governance conforms to th e Anglo-American corporate governan ce r egime. In addition, this article

examines Indonesia’s code of corporate governance and to determine whether the code is suitable

for solving the existing problems of SOEs, including pure SOEs. This study found that the

mainstream corporate governance is designed to deal with agency problem that occurs in publicly

traded companies with widely dispersed shareholders as opposed to non-listed companies such as

pure SOEs with the government as shareholder’s representative. It also found that the code has

failed to solve two other crucial problems, conflicting objectives and political interference.

However, the Indonesia code is currently the best solution in upholding listed companies with

fragmented shareholders.

1 Introduction

The Anglo-American or Anglo-Saxon corporate governance system and the Continental Europe system al so often

referred to as the German-Japanese model are two competing corporate governance r egimes. While the former is

credited as a dominant model, the latter is its challenger.1

A fiduciary c onnection between shareholders and managers is main characteristic of the Anglo-American

corporate governance model.2 The relationship between shareholders and managers is important as it creates

possible agency problems, which typically exist in companies with widely dispersed shareholders and where the

influence of shareholders over company’s management is not tough.3 These are the main features that underlie the

concept of the dominant model of corporate governance. This problem has existed and mushroomed in the United

Kingdom and the United States where the majority of the stocks in the biggest public companies are owned by

institutional investors.4

In contrast, the major feature of the Continental Europe model is that it considers both the shareholders’

interests and other stakeholders’ benefit, especially t he employees.5 Within the Continental Europe system, the

*Most of the article is based on a paper presented at “The 9th International Conference on Corporate Social Responsibility:

CSR and Global Governance” held by the Social Responsibility Research Network (SRRNet) in conjunction with the Zagreb

School of Economics & Management, on June 16-18, 2010 in Zagreb Croatia.

**PhD Candidate in Business Law, Macquarie University; LLM (Deakin); SH (Bung Hatta). The author wishes to thank his

supervisors, Dr. Niloufer Selvadurai and Associate Professor Hope Ashiabor, whose comments on earlier version of this

manuscript.

1 Marry O’Sullivan, Contests for Corporate Control Corporate Governance and Economic Performance in the United States

and Germany (1978)

2 Lucian Cernat, 'The Emerging European Corporate Governance Model: Anglo-Saxon, Continental, or Still the Century of

Diversity?' (2004) 11(1) Journal of European Public Policy 153

3 Ibid 151

4 Lorraine E. Talbot, Critical Company Law (2008)

5 Cernat, above n 2, 153

Journal of International Commercial Law and Technology Vol. 5, I ssue 4 (2010)

207

employee’s r epresentatives are given an opportunity to sit as members of company’s supervisory board. This

model essentially aims to c ounteract the misuse of executive power,6 which possibly occurs in the model of

Anglo-American.

The evolution of corporate governance law in Indonesia has a variety of un ique characteristics, notably the

application of the model t o State-owned Enterprises (SOEs). As seen from Indonesia’s code of corporate

governance text, the code is a reference point for all companies in Indonesia, including SOEs r egardless of t ypes.

Indonesian SOEs are regulated under Law No. 19 of 2003. According to the law, there are t wo types of SOEs:

limited liability companies and general companies. The former is divided into two types, and they are listed

companies or companies where shares are fragmented and non-listed companies (hereinafter “pure SOEs”), which

are companies where the government is representative of public as shareholder. Consequently, Indonesia’s code of

good corporate governance applies to pure SOEs as well.

The objectives of the present study attempts to determine the extent of how Indonesia’s concept of

corporate governance conforms to the Anglo-American corporate governan ce regime. In addition, this examines

Indonesia’s code of corporate governance and whether the code is suitable for solving the existing problems of

SOEs, including pure SOEs. The code is discussed as a national code of corporate governance and is the basis for

implementing a country’s corporate governance regime. Furthermore, though the discussion is based on

Indonesia’s non-listed SOEs, it might be applicable to other developing countries where SOEs exist.

The rest of the paper is organised as follows: Section 2 r efers to the theoretical development of corporate

governance covering the origins of corporate governance, categories of corporate governance, modern corporate

governance and codes of corporate governance framework. Section 3 deals with corporate governance in

Indonesia coverin g its short history and the inception of the Indonesian code of good corporate governance.

Section 4 examines Indonesian SOEs’ problems and section 5 provides a brief overview of Indonesia’s latest code

of good corporate governance. Section 6 argues that th e current Indonesian corporate governance regime is

conceptually unsuitable for Indonesia’s SOEs, notably pure SOEs. Section 7 concludes the discussion.

2. Theoretical Framework

2.1 The origins of corporate governance

Based on their seminal work on the separation of company ownership, Adolf Ber le and Gardiner Means7 ar e

considered distinguished scholars in the field of corporate governance. After conducting a study of America’s

larger companies after the Wall Street crash of 1929, they concluded that the separation of ownership and control

is attributable to widely fragmented company ownership.8 The dispersed sh areholders (principals) have n o choice

but to hire managers (agents) to manage the company, which has been creating the principal-agent relationship. In

effect, an agency problem typically arises from the principal-agent relationship9and as such, agents may

expropriate the principals’ investments. This can occur when the agents have more information and knowledge

than the principals10 or when information asymmetry between principals and agents exists.11 Further, there are two

situations that have been the focus of th e principal-agent framework. First, “moral h azard arises when the agent’s

action, or the outcome of the action, is only imperfectly observable to the principal. A manager, for example, may

exercise a low level of effort, waste corporate resources, or take inappropriate risks. Second, “Adverse selection

can arise when the agent has some private information, prior to entering into relations with the principal.

Individuals with poor skills or aptitude will present themselves as h aving superior ones, people with low

motivation will apply for the positions that involve the least supervision, and so forth”.12

6 Steve Letza et al, 'Corporate governance theorising: limits, critics and alternatives' (2008 ) 50 International Journal of Law

and Management 18

7 Adolf A. Berle and Gardiner C. Means, The Modern Corporation and Private Property (1932)

8 Talbot, above n 4, 109

9 Brian R. Cheffins, 'Law as Bedrock: The Foundations of an Economy Dominated by Widely Held Public Companies' (2003)

23 Oxford Journal of Legal Studies 3, 4

10 Yuwa Wei, Comparative corporate governance: a Chinese perspective (2003), 43

11 Jospeh Heath and Wayne Norman, 'Stakeholder Theory, Corporate Governance and Public Management: What Can the

History of State-Run Enterprises Teach Us in the Post-Enron Era?' (2004) 53 Journal of Business Ethics 252-253

12 Ibid