Sampoerna ITB

School of Business & Management

GOOD CORPORATE GOVERNANCE IMPLEMENTATION

Leo J. Susilo 2007

Sampoerna ITB
School of Business & Management

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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School of Business & Management

Agenda
1. 2. 3. 4. Why does GCG matter for Indonesia? Corporate Governance and enforcement GCG development in Indonesia Roadmap for GCG implementation

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School of Business & Management

Why Does Good Corporate Governance Matter for Indonesia?

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School of Business & Management

Why does GCG matter for Indonesia?

GCG does matter for Indonesia because: 1. Worlds 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 GCG 4. 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 ?
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School of Business & Management

Why does GCG matter for Indonesia?

Booz-Allen & Hamilton Survey (1999) Survey on legal system and GCG implementation
Jepang Singapore Malaysia Thailand Indonesia 0 2 4 6 8 10 12 Sistim hukum & peradilan Penerapan GCG

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

MENGAPA GCG DIPERLUKAN ?
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School of Business & Management

Why does GCG matter for Indonesia?

Transparency International Corruption Perception Index (2006)
130 Azerbaijan 130 Burundi 2.4 2.4

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 countries
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130

Central African Republic

2.4
2.4 2.4

130 Ethiopia 130 Indonesia

130

Papua New Guinea

2.4
2.4 2.4

130 Togo 130 Zimbabwe

MENGAPA GCG DIPERLUKAN ?

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Why does GCG matter for Indonesia?

World Map Corruption Perception Index 2006

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School of Business & Management

Why does GCG matter for Indonesia?

Political & Economic Risk Consultancy (PERC) Hongkong 2006
The Trend of Corruption in Asia over the Past Decade
1997 Singapore Japan Hong Kong Macao South Korea 1.05 4.6 3.03 N/A 7.71 1998 1.43 5 2.74 N/A 7.12 1999 1.55 4.25 4.06 N/A 8.2 2000 0.71 3.9 2.49 N/A 8.33 2001 0.83 2.5 3.77 N/A 7 2002 0.9 3.25 3.33 N/A 5.75 2003 0.38 4.5 3.61 N/A 5.5 2004 0.5 3 3.6 N/A 6.67 2005 0.65 3.46 3.5 N/A 6.5 2006 1.3 3.01 3.13 4.78 5.44

Taiwan
Malaysia India China Thailand Philippines Vietnam Indonesia

5.96
5.8 8.2 8.06 7.49 6.5 8 8.67

5.2
5.38 7.4 6.97 8.29 7.17 8.25 8.95

6.92
7.5 9.17 9 7.57 6.71 8.5 9.91

6.89
5.5 9.5 9.11 8.2 8.67 9.2 9.88

6
6 9.25 7.88 8.55 9 9.75 9.67

5.83
5.71 9.17 7 8.89 8 8.25 9.92

6.33
6 9.3 8.33 8.75 7.67 8.83 9.33

6.1
7.33 8.9 7.48 7.8 8.33 8.71 9.25

6.15
6.8 8.63 7.68 7.2 8.8 8.65 9.1

5.91
6.13 6.76 7.58 7.64 7.8 7.91 8.16

MENGAPA GCG DIPERLUKAN ?

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

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Why does GCG matter for Indonesia?

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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Why does GCG matter for Indonesia?

GCG Perception Index in Asia
No Country 2000
75 71 56 32 52 57 28

2001
74 68 54 37 38 55 37

2002
74 72 59 47 47 58 38

2003
77 73 66 55 55 58 46

2004
75 67 62 60 58 55 53

2005
70 69 61 56 52 50 50

1. Singapore 2. Hongkong 3. India 4. Malaysia 5. Korea 6. Taiwan 7. Thailand

8. Philippine
9. China 10. Indonesia

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36 29

33
34 32

36
39 29

37
43 32

50
48 40

46
44 37
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Source: Jamie Allen, Secretary General ACGA, Corporate Governance in Asia, Singapore, 2005

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Why does GCG matter for Indonesia?

SOEs were underperformed
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

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Why does GCG matter for Indonesia?

Some deviations in SOEs management
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 188

MEN

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School of Business & Management

Why does GCG matter for Indonesia?

McKinsey Survey (June 2000): Investors perception and premium offered on best implementation of Good Corporate Governance in some Asian countries
Investors perception
Japan Taiw an Korea Thailand Malaysia Indonesia 0 1 2.8 2.2 2.6 2.3 1.8 1.8 1.5 1.7 1.3 1.1 1.1 2 3 4 Asia Investors US&Europe Asia Investors 5 2.2

Premium accepted
Japan Taiw an Korea Thailand Malaysia Indonesia 15% 20% 25% 19% 22% 18% 24% 22% 29% 24% 28% 24% 26% 26% 30% 30%

US&Europe Investors

MENGAPA GCG DIPERLUKAN ?

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School of Business & Management

Why does GCG matter for Indonesia?

Reason to implement GCG
Why implement GCG Internal Factors
- Socially responsible company - Shareholders Wealth Maximization

External factors

Market requirements Regulation requirements

Investor Premium Political Risk IMF requirement SOE Minister Decree no. 117 SOE Law No. 119/2003 Capital Market Law
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MENGAPA GCG DIPERLUKAN ?

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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 lawson-the books is the key problem
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Why enforcement?
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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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 Enforcement
Some 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 Enforcement
The 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, companys 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 Enforcement
Public 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 Enforcement
Public 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 Enforcement
Example : 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

1997
Good Corporate Governance (GCG) clause in Letter of Intent (LoI) as a part of Banking Reformation & Restructuring

1999

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

1.Establishment of NGOs, who are concern for GCG implementation (now is about 9 organizations exist) 2.GCG Implementation is put in LoI with IMF

2000

2001

1.Indonesian Code on GCG was published by NCGCG 2. For the first time The Indonesian Institute for Corporate Governance (IICG) conducted survey on Corporate Governance Perception Index (CGPI)
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Chronological Endeavour to implement GCG in Indonesia

2002
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 Directors 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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2003

2004

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Chronological Endeavour to implement GCG in Indonesia

2005
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.

2006

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 Industry 4. KNKG issued revised Indonesian Code on GCG,
Parliament passed new Company Law and new Investment Law, which both have CSR clause.
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2007

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Some Indicators on GCG Implementation

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.
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ROADMAP FOR GCG IMPLEMENTATION

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GCG Implementation Philosophy

ECONOMY
Market driven PERFORMANCE

Ethics driven CONFORMANCE

Zone of sustainable activities

ETHICS LAW
Regulatory driven COMPLIANCE

Harvards Leadership & Corporate Accountability Model

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GCG Implementation Framework

CORPORATE STRATEGY BIZ PROCESS & SUPPLY CHAIN MANAGEMENT FINANCE MGT, RISK MGT, ETC. CORPORATE LEADERSHIP THE AGGREGRATE WELFARE OF ALL CORPORATE STAKEHOLDERS

PERFORMANCE

CONFORMANCE

BOARD ETHICS

CORPORATE ETHICS

CORPORATE SOCIAL RESPONSIBILITY

COMPLIANCE

CORPORATE ORGANS DUTIES & LIABILITIES (COMPANY LAW)

INTERNAL STANDARD & REGULATION OPERATIONAL LAW & REGULATIONS SUCH AS INSURANCE LAW , LABOR LAW, ETC

CIVIL LAW CRIMINAL LAW ANTI BRIBERY & CORRUPTION

BOARD

ENTREPRISE WIDE

STAKEHOLDERS
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GCG Implementation Roadmap

GCG
Good Corporate Governance

GGC
GCG IMPLEMENTATION PREPARATION
Good Governed Company

GCC
Good Corporate Citizen

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

To be good corporate citizen through corporate social responsibility implementation

CONTINUOUS IMPROVEMENT

GOOD GOVERNANCE & VALUE CREATION

1st to 9th month 6th to 18th month After 12th month 33

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GCG Roadmap: Preparation

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: Stage I

GCG
OBJECTIVE Comply to existing law and regulation (mandatory and voluntary) ACTIVITIES 1. Conduct GCG assessment to get the GCG implementation status 2. Compose and establishe GCG manuals: GCG code Board Manual Committees Charters (Audit Committee, GCG Committee, etc.) Code of Conducts GCG Self-assessment 3. Socialization and start implementation

GGC
INDICATORS

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

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

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GCG Roadmap: Stage II

GCG GGC GCC

OBJECTIVE

ACTIVITIES

INDICATORS 1. All SOPs are risk based and content GCG principles . 2. Business operations are effectively controlled. 3. Risk culture is starting to emerge.

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

To establish 1. Intensive and extensive GCG better internal socialization; followed by control implementation and rounded by management periodical assessment especially in 2. Application of GCG principles in handling business process SOP business risk 3. Establish internal control system effectively which consists of; control through proper environment, risk assessment, risk control activities, information management and communication and monitoring

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GCG Roadmap: Stage III

GCG GGC GCC

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

ACTIVITIES 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.

INDICATORS 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

OUTCOME Acknowledged as: Blue chip company Most wanted place to work Receive a lot of awards

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