3 - good corporate governance implementation

Sampoerna – ITBSchool of Business & Management

GOOD CORPORATE GOVERNANCE IMPLEMENTATION

Leo J. Susilo2007


Learning Objective

• To understand why Good Corporate Governance is matter for Indonesia

• To understand how to implement Good Corporate Governance (GCG) in Indonesian context

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Agenda

1. Why does GCG matter for Indonesia?2. Corporate Governance and enforcement3. GCG development in Indonesia4. Roadmap for GCG implementation

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Why Does Good Corporate Governance Matter for Indonesia?

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GCG does matter for Indonesia because:1. World’s perception of Indonesia economy as a whole is

not quite good;2. The general perception of Indonesian State Owned

Enterprises (SOE) are underperformed and there are lot of deviations and corruptions;

3. For SOEs, legally it is mandatory to implement GCG4. GCG provides added value for national economy as well as

for the company, who has well implemented.5. Failure in implementing GCG was one of major causes of

last economic crisis

MENGAPA GCG DIPERLUKAN ?

Why does GCG matter for Indonesia?


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Booz-Allen & Hamilton Survey (1999)Survey on legal system and GCG implementation

0 2 4 6 8 10 12

Indonesia

Thailand

Malaysia

Singapore

Jepang

Sistim hukum &peradilan

Penerapan GCG



Scoring on 10 scale base, 10 is the best and 0 is the worst


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Transparency International – Corruption Perception Index (2006)

• Scoring on 10 scale basis, 10 is the cleanest, no corruption and 0 is the most corrupt country

• Survey was conducted in 163 countries and Indonesia together with 8 other countries rank 130 with the score 2.4. The highest score is 9.6 is occupied by Finland, New Zealand and Iceland. The lowest is Haiti scores 1.8

• 2003 survey result :

• Indonesia scores 1.9

• Rank 122 of 133 countriesMENGAPA GCG DIPERLUKAN ?



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World Map Corruption Perception Index 2006Why does GCG matter for Indonesia?


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Political & Economic Risk Consultancy (PERC) – Hongkong 2006


The Trend of Corruption in Asia over the Past Decade

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Singapore 1.05 1.43 1.55 0.71 0.83 0.9 0.38 0.5 0.65 1.3

Japan 4.6 5 4.25 3.9 2.5 3.25 4.5 3 3.46 3.01

Hong Kong 3.03 2.74 4.06 2.49 3.77 3.33 3.61 3.6 3.5 3.13

Macao N/A N/A N/A N/A N/A N/A N/A N/A N/A 4.78

South Korea 7.71 7.12 8.2 8.33 7 5.75 5.5 6.67 6.5 5.44

Taiwan 5.96 5.2 6.92 6.89 6 5.83 6.33 6.1 6.15 5.91

Malaysia 5.8 5.38 7.5 5.5 6 5.71 6 7.33 6.8 6.13

India 8.2 7.4 9.17 9.5 9.25 9.17 9.3 8.9 8.63 6.76

China 8.06 6.97 9 9.11 7.88 7 8.33 7.48 7.68 7.58

Thailand 7.49 8.29 7.57 8.2 8.55 8.89 8.75 7.8 7.2 7.64

Philippines 6.5 7.17 6.71 8.67 9 8 7.67 8.33 8.8 7.8

Vietnam 8 8.25 8.5 9.2 9.75 8.25 8.83 8.71 8.65 7.91

Indonesia 8.67 8.95 9.91 9.88 9.67 9.92 9.33 9.25 9.1 8.16

Scoring on 10 scale basis, 0 is no corruption and 10 is the most corrupt



• In 2001 Credit Lyonnaise Securities Asia (CLSA) surveyed 495 Blue Chips in emerging market,, 18 were from Indonesia:. The result showed:– The best : HSBC (Honkong)– The 2nd best : Infosys (India)– The 3rd best : SIA (Singapura)– The best 50 : Non from Indonesia– The Worst 25 : 5 from Indonesia (no. 471,472,489,493,495) – The Worst : No. 495 from Indonesia

• Credit Lyonnaise Securities Asia Survey in 2005, Indonesia was the worst among 10 countries surveyed on GCG implementation.

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No Country 2000 2001 2002 2003 2004 2005

1. Singapore 75 74 74 77 75 70

2. Hongkong 71 68 72 73 67 69

3. India 56 54 59 66 62 61

4. Malaysia 32 37 47 55 60 56

5. Korea 52 38 47 55 58 52

6. Taiwan 57 55 58 58 55 50

7. Thailand 28 37 38 46 53 50

8. Philippine 29 33 36 37 50 46

9. China 36 34 39 43 48 44

10. Indonesia 29 32 29 32 40 37

GCG Perception Index in Asia

Source: Jamie Allen, Secretary General ACGA, Corporate Governance in Asia, Singapore, 2005


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January 2002 data:

• Total numbers of SOEs is 161 companies

• Total asset is Rp 772,5 trillion, total profit before tax is Rp 22, 783 trillion. ROA is only 3,60%, it shows that in total SOEs is underperformed.

• Source of profits consist of 90% from 42 companies and 103 other companies contribute only 10%.

• The growth data of those 42 companies during 1989 – 2001 is:

• 13 companies are high growth : more than 18%

• 19 companies are sustainable growth : between 7 – 18%

• 10 companies are low growth : less than 7%Sumber : I Nyoman Tjager, F. Antonius Alijoyo, Humphrey R Djemat & Bambang Soembodo, “Corporate Governance”, Prenhalindo,

Jakarta 2003, hal 189 - 192

Why does GCG matter for Indonesia?SOEs were underperformed


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• Directors’ remuneration package is still not directly related to the performance of the company and in some cases some misuse of facilities are found;

• The intervention from shareholders is too strong, it makes the Boards cannot give their best for the best of company interest. In some cases it is more to the “political interest” of the shareholders;

• There is “high past service liabilities” burden for the company, but it is not for the Boards;

• The expansion strategy is not solely for the best interest of the companies, but in many cases just only to increase the size of the company, so it improve the image of the Boards, which no necessarily enhance the company strategic positioning.

Sumber : I Nyoman Tjager, F. Antonius Alijoyo, Humphrey R Djemat & Bambang Soembodo, “Corporate Governance”, Prenhalindo, Jakarta 2003, hal 188MEN

Why does GCG matter for Indonesia?Some deviations in SOEs management


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1.1

1.3

1.5

1.8

2.3

2.2

1.1

1.7

1.8

2.2

2.6

2.8

0 1 2 3 4 5

Indonesia

Malaysia

Thailand

Korea

Taiw an

Japan

US&Europe Investors Asia Investors

30%

26%

28%

29%

24%

22%

26%

24%

24%

22%

18%

19%

15% 20% 25% 30%

Indonesia

Malaysia

Thailand

Korea

Taiw an

Japan

US&Europe Asia Investors

Investors’ perception Premium accepted

McKinsey Survey (June 2000):Investors’ perception and premium offered on best implementation of Good Corporate Governance in some Asian countries




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- Socially responsible company- Shareholders Wealth Maximization

• Investor Premium• Political Risk• IMF requirement

• SOE Minister Decree no. 117

• SOE Law No. 119/2003

• Capital Market Law

Why implement

GCG

Internal Factors

External factors

Market requiremen

ts

Regulation requiremen

ts


Why does GCG matter for Indonesia?Reason to implement GCG


CORPORATE GOVERNANCE AND ENFORCEMENT

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Why enforcement?• Much effort in recent years has been devoted to the

formulation of ever more elaborate and complete rules of corporate governance. In addition to laws and regulations, more informal codes of conduct have been adopted.

• There are still many concerns regarding the effectiveness of corporate governance rules. In other words, the written rules are not adhered to and pronouncements of firms are not being followed up by actions.

• In great part this is because rules and regulations are not enforced and increasingly policymakers have come to realize that enforcement more than regulations and laws-on-the books is the key problem

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• The importance of the enforcement is the key to effective implementation of good corporate governance. Corporate governance and enforcement mechanisms are intimately linked as they affect firms’ ability to commit towards their stakeholders, in particular towards external investors.

• In light of the importance to the enforcement of GCG, OECD put additional principle, that is, Ensuring the Basis for an Effective Governance Framework, which outlines some enforcement principles.

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Why enforcement?


Enforcement mechanism

In general there are 2 kinds of enforcements, i.e.:1. Private enforcement: basically is the enforcement

among parties through contract and other agreements. The enforcement mechanism is using “persuasive/moral power” or group sanction. The aim of private enforcement is, to encourage ethical corporate behavior;

2. Public enforcement: basically is the enforcement using the existing law, may it private law or public law. The aim of public enforcement is, to deter fraudulent corporate act and behavior.

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Private EnforcementSome prerequisites of private enforcement are:• High level of awareness and understanding from the

actors (shareholders/investors, Board Member and management ) of their rights, duties and liabilities;

• The existence of credible rating agencies, who gives periodically the performance of the companies;

• There is a market discipline, which always demands the integrity of the company reporting as well as the disclosure of information on significant corporate actions or events;

• The existence of internal rules or standards, that make the actors periodically monitor the company performance

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Private EnforcementThe enforcement take place in 2 ways, i.e.:1. Market response: is the response of the market caused

by the reputation of the company. This reputation is based on the rating by the rating agencies, such as GCG Award, Annual Report Award, CSR Award, etc.;

2. Internal rules and standards: How far did the actors or members of the market or association abide themselves to the agreed rules and standards, such as Bapepam rules, Brokers’ code of conducts, company’s code of conducts, etc. What did happen if they violate or broke the internal rules and standard? It has to have a clear mechanism to give sanction on that violation.

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Public EnforcementPublic enforcement could be effective if:• The legal and regulatory requirements that affect

corporate governance practices in a jurisdiction are consistent with the rule of law, transparent and enforceable.

• The law and regulation in company and financial affairs are suitable to the market needs and demands and cause no confusion in implementation;

• The division of responsibilities among different authorities in a jurisdiction should be clearly articulated and ensure that the public interest is served.

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Public EnforcementPublic enforcement could be effective if (continued):• The enforcement and monitoring authorities should

be credible, efficient and have a high integrity;• There is consistent monitoring and periodical

reporting and should there is violation of the law or regulation, it must be punished accordingly;

• The due process of law should be transparent, efficient and timely conducted, and also the coordination among the authorities should be smooth and timely done.

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Public EnforcementExample : GCG implementation in Bank• Law: Law No. 7/1992 jo. No. 10/1998 on Banking

Industry;• Regulation:

– Indonesian Central Bank Act PBI No. 8/14/PBI/2006 jo No. 8/14/PBI/2006; on Implementation of GCG in Bank;

– Indonesian Central Bank Circular Letter No. Regarding Self-Assessment and Periodical Report on Implementation of GCG in Bank;

• Oversight and monitoring authority: Indonesian Central Bank

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GCG DEVELOPMENT IN INDONESIA

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Chronological Endeavour to implement GCG in Indonesia

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Good Corporate Governance (GCG) clause in Letter of Intent (LoI) as a part of Banking Reformation & Restructuring

Establishment of National Committee on Corporate Governance (NCGCG / KNKCG)

1997

1999

1.Establishment of NGOs, who are concern for GCG implementation (now is about 9 organizations exist)

2.GCG Implementation is put in LoI with IMF2000

1.Indonesian Code on GCG was published by NCGCG2. For the first time The Indonesian Institute for Corporate

Governance (IICG) conducted survey on Corporate Governance Perception Index (CGPI)

2001



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2002

2003

2004

1. SOE Ministerial Decree No.117/2002 on Implementation of GCG in SOE and formation of Audit Committee in SOE

2. Corporate Annual Report Award contest

1. Bapepam (Capital Market Authority) issue the rule on periodical report and Director’s liability on financial report.

2. GCG is a part of Indonesian Banking Architecture rule

1. KNKCG issued Banking GCG Code and Code for Audit Committee;2. Bapepam issued rule for Audit Committee, Directors and

Commissaries;3. SOE Minister issued decree on Management Contract for Directors

and Commissaries of SOE;4. Changes of KNKCG become Komite Nasional Kebijakan Governance

(KNKG / NCCG), which consists of Public Governance Subcommittee and Corporate Subcommittee.



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2005

2006

2007

1. NCCG declared its “Destination Statement” to put Indonesia in “Top quartile of international rating in GCG implementation Index” in 2009.

2. GCG implementation is becoming consideration in award giving by various parties.

1. Indonesian Central Bank issued Act (PBI) on GCG Implementation for Bank

2. SOE Minister issued a decree on Requirement and Procedures for Directors and Commissaries Promotion;

3. KNKG issued GCG Code for Insurance Industry4. KNKG issued revised Indonesian Code on GCG,

Parliament passed new Company Law and new Investment Law, which both have CSR clause.


Some Indicators on GCG Implementation

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• Participants of Annual Report Award contest is increasing :• 2002 : 83 participants• 2003 : 84 participants• 2004 : 88 participants• 2005 : 122 participants• 2006 : 105 participants

• Assessment on GCG Implementation for SOEs were conducted by external assessor;

• Some banks and private corporation requested voluntarily to be assessed by international agency for GCG implementations;

• GCG implementation is becoming consideration in award giving by various parties.

• Banks were preparing to implement GCG as requested by BI Act (Peraturan Bank Indonesia/PBI) No. 8/4/PBI/2006 JO. No. 8/14/PBI/2006.


ROADMAP FOR GCG IMPLEMENTATION

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LAWETHICS

ECONOMY

Zone of sustainable

activities

Harvard’s Leadership & Corporate Accountability Model

Market driven

CONFORMANCE

COMPLIANCE

PERFORMANCE

Regulatory driven

Ethics driven

GCG Implementation Philosophy


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PERFORMANCE

CONFORMANCE

COMPLIANCE

BOARD ENTREPRISE WIDE

STAKEHOLDERS

• CORPORATE STRATEGY

• CORPORATE LEADERSHIP

• BIZ PROCESS & SUPPLY CHAIN MANAGEMENT

• FINANCE MGT, RISK MGT, ETC.

• CORPORATE ETHICS

• INTERNAL STANDARD & REGULATION

• OPERATIONAL LAW & REGULATIONS SUCH AS INSURANCE LAW , LABOR LAW, ETC

• CORPORATE SOCIAL RESPONSIBILITY

• THE AGGREGRATE WELFARE OF ALL CORPORATE STAKEHOLDERS

• BOARD ETHICS

• CIVIL LAW

• CRIMINAL LAW

• ANTI BRIBERY & CORRUPTION

• CORPORATE ORGAN’S DUTIES & LIABILITIES (COMPANY LAW)

GCG Implementation Framework


GCG Implementation Roadmap

33After 12th month

Comply to existing law and regulation related to GCG (mandatory and voluntary one)

Comply to existing law and regulation related to GCG (mandatory and voluntary one)

Well controlled operation through proper internal control and implementation of risk management

Well controlled operation through proper internal control and implementation of risk management

To be good corporate citizen through corporate social responsibility implementation

To be good corporate citizen through corporate social responsibility implementation

1st to 9th month

CONTINUOUS IMPROVEMENT

GCG

IMPL

EMEN

TATI

ON

PR

EPAR

ATIO

N

6th to 18th month

GOOD GOVERNANCE & VALUE CREATIONGOOD GOVERNANCE & VALUE CREATION

GGCGood Governed Company

GCCGood Corporate Citizen

GCGGood Corporate Governance


• GCG implementation project not only need support from top management, but they are literally have to involve in the process;

• GCG project is a long term project, since GCG process basically is continuing and never ending process.

• The preparation activities consist of:– Establishment of the project team– Create awareness building program for the

implementation of GCG– Conduct assessment of current GCG implementation as a

start for the implementation stage 1.

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GCG Roadmap: Preparation


GCG Roadmap: Stage I

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OBJECTIVE ACTIVITIES INDICATORS OUTCOME

Comply to existing law and regulation (mandatory and voluntary)

1.Conduct GCG assessment to get the GCG implementation status

2.Compose and establishe GCG manuals:

• GCG code• Board Manual• Committee’s Charters

(Audit Committee, GCG Committee, etc.)

• Code of Conducts• GCG Self-assessment

3.Socialization and start implementation

1.All GCG manuals are completed

2. Increasing awareness of GCG

3.Compliance to the existing law and regulation is improving

4. Internal control structure is start to forming

Improvement in compliance and better management control, which resulted in performance improvement

GCG GGC GCC


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GCG Roadmap: Stage II

GCG GGC GCC


To establish better internal control management especially in handling business risk effectively through proper risk management

1. Intensive and extensive GCG socialization; followed by implementation and rounded by periodical assessment

2. Application of GCG principles in business process SOP

3. Establish internal control system which consists of; control environment, risk assessment, control activities, information and communication and monitoring

1. All SOPs are risk based and content GCG principles .

2. Business operations are effectively controlled.

3. Risk culture is starting to emerge.

Company performance is improving and also the credit rating is increasing.


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GCG Roadmap: Stage III

GCG GGC GCC


Reaching the position as an ethical and responsible corporation, also known as good corporate citizen

1. Conducts ethic programs and corporate culture programs to put code of conducts as part of daily corporate life.

2. Conduct Strategic Corporate Social Responsibility effectively.

3. Implement “Green Company Operation System”.

4. Adjust all system and procedure accordingly.

1. Known as an ethical corporation

2. Real and measurable contribution to the welfare of:

• Local community• Country• Global

3. Concern and care the environment

Acknowledged as:• Blue chip

company• Most wanted

place to work• Receive a lot of

awards

3 - good corporate governance implementation

Documents

good corporate citizen

mengapa gcg diperlukan

good corporate governance

public enforcementpublic enforcement

corporate governance

periodical report

internal rules

award giving