CORPORATE GOVERNANCE IN INDONESIAN STATE-OWNED

ENTERPRISES: IS IT ON THE RIGHT TRACK?

Miko Kamal
Macquarie University – Macquarie School of Law

Macquarie Law WP 2008-30

December 2008

Electronic copy available at: http://ssrn.com/abstract=1311030

Disclaimer
Working papers are produced as a means of disseminating work in progress to the
scholarly community in Australia and abroad. They are not to be considered as the
end products of research, but as a step towards publication in scholarly outlets.

© Copyright: Miko Kamal*

Macquarie School of Law - Research

Macquarie University
Sydney NSW 2109
Australia

Tel 61 2 9850 7061

Fax 61 2 9850 7686
Email research@law.mq.edu.au
URL http://www.law.mq.edu.au/research

Associate Dean, Research Professor Andrew Buck

Research Officer Ms Glenda Hewett

ISSN 1835-2286

Macquarie Law WP 2008-30

CORPORATE GOVERNANCE IN INDONESIAN STATE-OWNED

ENTERPRISES: IS IT ON THE RIGHT TRACK?

* Corresponding Author

Contact Details:

Phone: + 61 2 9850 7019

Fax: + 61 2 9850 9952
Email: Miko.Kamal@law.mq.edu.au

Postal: Miko Kamal

Macquarie School of Law
Macquarie University
NSW 2109
Australia

Electronic copy available at: http://ssrn.com/abstract=1311030

 CORPORATE GOVERNANCE IN INDONESIAN STATE-OWNED
ENTERPRISES: IS IT ON THE RIGHT TRACK?

Abstract:
This paper looks at the reformation of corporate governance Indonesia in the sector of
state-owned enterprises, especially from the perspective of law. The focusing is to
examine the voluntary and mandatory corporate governance models by comparing the
prevailing corporate governance systems, pre-existing in several countries such as the
US, Australia, Germany and Indonesia. The voluntary model means listed companies
that might not abide by the principles but have to provide sufficient and reasonable
arguments as to why it is not complying are protected against; while the latter is a
model in which a listed company has to comply with the corporate governance code
for avoiding penalties. The US employs the mandatory model; Australia, Germany
and Indonesia apply the voluntary one.

This paper suggests that the mandatory model is suitable to be implemented. The
existing of corporate spivs and new hope of the Indonesian Corruption Eradication
Commission are the article’s central arguments to suggest employing the mandatory
model.

Keywords:
corporate governance, voluntary and mandatory models, Indonesia and state-owned
enterprises

3
COPRORATE GOVERNANCE IN INDONESIAN STATE-OWNED ENTERPRISES:
IS IT ON THE RIGHT TRACK?*
MIKO KAMAL**

I INTRODUCTION
The enactment of the Sarbanes-Oxley Act of 2002 (“SOX”) 1 has radically changed
the face of corporate governance systems all over the world which, from a law point
of view, divides corporate governance into two models of regulation 2 ; they are
voluntary and mandatory systems. Australia, the United Kingdom (“UK”) and
Germany, for instance, apply the voluntary model. The United State (“US”) employs
mandatory one.

This article looks at the development of corporate governance in Indonesian state-

owned enterprises, especially from a legal perspective by examining the respective
merits of voluntary and mandatory corporate governance models by comparing the
prevailing corporate governance systems, pre-existing in several countries such as the
US, Australia, the UK, Germany and Indonesia. It then discusses what should be done
to meet the hope to realize both a good corporate governance and good corporate
performance in the sector of state-owned enterprises in 2028.

* The article will be published in Fahmi and Suwarso (eds), TheVoice of Indonesian Future Leaders,
Pustaka Fahima, Yogyakarta, 2009.

** PhD Candidate at Dept. of Business Law, Div. of Law, Macquarie University Sydney. The author
gained his bachelor of law degree (S.H.) at Universitas Bung Hatta (Padang, Indonesia) and went to
Deakin University Melbourne for his LLM in Commercial Law. He is grateful to Dr. Lisa Ford of
Division of Law Macquarie University for her helpful comments on this paper.

1
SOX is a law enacted by United States federal in response to a number of major corporate and
accounting scandals by improving accuracy and reliability of corporate disclosures.

2
In a broad sense, scholars distinguish corporate governance in difference models, for instance Pinto
divides it into two models, which are “the stakeholder model” and “the ownership model”. For detail,
see Pinto, Globalization and The Study of Comparative Corporate Governance, (2005) 23 Wis. Int’l L.J.

4
The predominant argument of the article is the mandatory model is ideally suited to
Indonesian state owned enterprises because corporate spivs now exist; in actual fact
the voluntary model is powerless against the conditions.

II THE TWO MODELS: AN OVERVIEW

Voluntary and mandatory regimes have similar aims with different approaches. The
Netherlands Minister for Finance, Gerrit Zalm, states that there is no radical
distinction between the US’s system (mandatory) and the voluntary system that is
adapted by the Europe Union (EU). 3 In practice, the U.S solves the problem by
creating hard law while the EU takes a softer approach by encouraging listed
companies to apply self regulation. It says that “Europe is firm on the principles, but
flexible on their application”. 4 The following is an examination of these regimes in
the context of Australia, the UK, Germany and the US.

II.I Voluntary Model

The ASX (Australia Stock Exchange) Corporate Governance Council (“Council”)
explicitly asserts that the Australian Principles of Good Corporate Governance and
the Best Practice Recommendation contains a voluntary system which mean listed
companies might not comply with the principles but have to provide sufficient and
reasonable arguments as to why it is not complying with. The Australian system
functions on the basic principle: “if not, why not” rather than a “one size fits all”
5
approach. Also, it asserts that the principles are not a prescription but they are

3
Zalm, Corporate Governance in the United State and the European Union: Same Principles,
Difference Approaches, (2003)
<http://www.minfin.nl/default.asp?CMS_ITEM=4224163DD8444FEE895CDAFD052E40E1X2X437
78X92>
at 7 August 2004

4
Ibid

5
2nd ASX Corporate Governance Council, Corporate Governance Principles Recommendations,
(August 2007)

5
pathways to achieve efficiency, quality and integrity as the outcome of all listed
companies in the ASX. 6

An Australian commentator once said “the philosophy that underpins the ASX
approach is that the market can come to its own conclusions about the significance of
non-compliance within the circumstances of individual companies”. 7 In other words,
the initial drafters of the principles seem to give freedom to the listed companies
creating their own system in running their companies as long as they have reasonable
reason of why they are doing it.

The Australian model could be adopted from the UK’s system; it can be seen in the
2000 code on corporate governance of the UK, sometimes called the combined code
on corporate governance. The execution of the voluntary system in the UK can be
viewed in paragraph 4 of preamble of the combined code, which states two things:
Firstly, listed companies are free to make the form of disclosure statement because the
committee does not provide listed companies a specific form. Finally, there is no a
requirement for all listed companies to apply the content of the codes. Where listed
companies do not adhere to the combined code, they must explain it; this is known as
“comply or explain” principle. 8

The “comply or explain” approach has been applied in the UK with regards to smaller
listed companies. The drafter of the combined code was aware that there are many

<http://www.asx.com.au/supervision/pdf/corp_governance_principles_recommendations_2nd_edition.
pdf> at 15 April 2008

6
Ibid

7
Barholomeusz, Governance changes may have unforeseen effects on boards, (April 5, 2003)
<http://www.theage.com.au/articles/2003/04/04/1048962935224.html> at 20 March 2008

8
The Combined Code on Corporate Governance (July 2003),
<http://www.frc.org.uk/documents/pagemanager/frc/Web%20Optimised%20Combined%20Code%203
rd%20proof.pdf> at 15 April 2008

6
small listed companies, which might be not suitable to apply the substance of the
code. Thus, the smaller listed companies are allowed to conduct their business under
the other model by giving substantial reason.9 To put it simply way, the UK combined
code realizes that not all listed companies need a single model in driving the
company.

The other country that applies the voluntary system is Germany. The recent German
Corporate Governance Code was amended on June 14, 2007. The code contains two
basic purposes, namely; (1) this applies to listed companies, and; (2) it is a voluntary
model: where listed corporations do not comply with the code they have to provide an
appropriate explanation on it. 10 Plessis explains that the German code has a unique
model in applying the voluntary code where the obligation of listed company to
explain its position is included “to German law through a statutory provision, section
161 of the Akt” (Aktiengesetz). 11 Suffice it to say that the German voluntary model is
a slightly difference when compared with the system applied to other countries such
as the UK and Australia that have conducted the pure voluntary corporate governance
regime.

9
Ibid

10
Government Commission German Corporate Governance Code (June 14, 2007)
<http://www.corporate-governance-code.de/eng/download/E_Kodex_2007_final.pdf> at 15 April 2008

11
Plessis, Reflection on Some Recent Corporate Governance Reforms in Germany: A Transformation
of the German Aktienrecht?, (2003) 8 Deakin Law Review 390

7
II.II Mandatory Model
“Corporate misdeeds will be found and will be punished…
The SEC [Security and Exchange Commission] will now have the
administrative authority to bar dishonest directors and officers from ever
again serving in positions of corporate responsibility…
Corporate crime will no longer pay”. 12
(President Bush’ speech when signing the SOX)

The above President Bush’s statement can be seen as the American traumatic of the
disgraceful tragedy due to the collapse of some huge companies such as Enron,
WorldCom, Tyco International, etc. This situation then encouraged the government to
set up a specific instrument of corporate governance administration. On July 30, 2002
the American Congress passed a new law, the Sarbanes-Oxley act of 2002. This is the
most important law reform relating to corporate governance in the US, 13 which
requires all companies that have registered equity or debt securities with the Security
and Exchange Commission (“SEC”) to adhere to it. In this sense, the listed companies
have to meet all of the requirements contained in the SOX; the so-called mandatory
model. Academically, as defined by Anand, the mandatory model of corporate
governance means compliance is “legally mandated, with penalties imposed on those
who fail to comply with the legal rule in question”. 14

The advocates of the system claim that it would be a way for overcoming the crucial
problem of corporate governance today. Paul Atkins, the Commissioner of SEC
argues that the world needs a strict corporate governance regime, which is able to
eliminate fraudulence, corruption and other misdeeds and practice so that America has

12
The White House, President Bush Signs Corporate Corruption Bill, (July 2002),
<http://www.whitehouse.gov/news/releases/2002/07/20020730.html> at 8 April 2008
13
Ribstein, Market vs. Regulatory to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002,
(2002) Journal of Company Law 3

14
Anand, Voluntary vs. Mandatory Corporate Governance: Towards and Optimal Regulatory
Framework, (March 29, 2005) bepress Legal Series. Working Paper 566, 4
<http://law.bepress.com/expresso/eps/566> at 16 April 2008

8
to be a pioneering country to embody a special law on that matter. Furthermore,
Atkins argues that by using soft law and requiring a company to hire a number of non-
executive directors could not prevent corporate failures. 15 In other words, though
Enron and WorldCom had non-executive directors, they could not prevent theses
companies from bankruptcy. 16

III CORPORATE GOVERNANCE IN INDONESIA

III.I The short history

From the perspective of history, the delivery of corporate governance in Indonesia
was not based upon local initiative. 17 However, it followed the 1997 South Asian
financial crisis, which impacted severely on a number of Southeast Asian countries,
including Indonesia. At the time the Indonesian currency depreciated nearly by 80
percent and some businesses, especially in the banking sector, collapsed. 18 Tabalujan
states that the 1997 Asian financial tragedy was milestone in the history of corporate
governance in Indonesia. He reflects that the financial condition in 1997 was abysmal
where the value of the rupiah at mid-August 1997 had lost 27% against the United
States (US) dollar. 19 In this condition, the International Monetary Funds (IMF) came
to offer a favour. The IMF offered a conditional loan, which means that they would
give the loan if Indonesia meeting couple of requirements. One of the requirements is

15
Atkins, Speech by SEC Commissioner: The Sarbanes-Oxley Act 2002:Goals,Content,and Status of
Implementation, (February 5,2003) <http://www.sec.gov/news/speech/spch020503psa.htm> at 20
March 2008

16
Ibid

17
Daniel, Corporate Governance in Indonesian Listed Companies – A Problem of Legal Transplant,
(2003) 15 Bond Law Review, 357

18
Ibid 318

19
Tabalujan, Why Indonesian Corporate Governance Failed – Conjectures Concerning Legal Culture,
(2002) 15 Columbia Journal of Asian Law, 4

9
restoring the corporate governance system. 20 The government concurred with the
conditions, which can be learnt from 5 letters of intent of the government of
Indonesian to the IMF. 21

In 1999, the Indonesian Government by way of the Coordinating Minister for

Economy, Finance and Industry created the National Committee on Corporate
Governance (“NCCG”), which has two main duties, namely to codify corporate
governance principles and to develop an institutional framework to implement the
code. 22 Subsequently, by March 2000 the Committee has been successful to incept the
Code for Good Corporate Governance. 23 This applies for state-owned enterprises and
companies listed in the Jakarta Stock Exchange. 24

In 2004 the government changed the NCCG to the National Committee on

Governance (“NCG”), which embraces Public Governance Sub-committee and
Corporate Governance Sub-committee. 25 In 2006 the NCG reviewed the Code for
Good Corporate Governance under title Indonesia’s Code of Good Corporate
Governance. 26

20
Kurniawan and Indrianto, Corporate Governance in Indonesia, (31 May – 2 June 2000) Paper on The
Second Asian Roundtable on Corporate Governance, 9

21
Letters of Intent dated October 31, 1997; July 29, 1998; May 14, 1999; July 22, 1999; and January
20, 2000.
22
The Decree of the Coordinator Minister of the Economic, Finance and Industry No.
1/M.EKUIN/08/1999 dated 9 August 1999.

23
Daniel, above n 17 360

24
Lukviarman, Kendala Penerapan Good Corporate Governance di Indonesia, (2004) 6-7

25
National Committee on Governance, Indonesia’s Code of Good Corporate Governance, (2006) i
<http://www.governance-indonesia.com/donlot/Pedoman%20GCG%20Indonesia%202006.pdf> at 22
April 2008

26
Ibid

10
In the banking sector, on January 30, 2006 the Governor of Bank Indonesia issued the
Bank Indonesia regulation No. 8/4/PBI/2006; this is an instruction of the Governor to
implement Good Corporate Governance in Conventional Commercial Bank (Bank
Umum). As a result, the code applies to 3 types of companies, namely listed
companies, state-owned enterprises and conventional commercial bank.

III.II State-owned enterprises sector

Indonesia state-owned enterprises are stipulated by Law No. 19 of 2003. Article 1
paragraph 1 of the law provides that a business entity categorised as state-owned
companies if all or most of its capital is owned by state by way of modal direct
participation, which stems from the separating of the state’s funds. 27
In terms of the implementation of corporate governance, it is regulated by the
Indonesian Minister for State-Own Enterprises’ Decree No. 117/M-MBU/2002.
Generally, the Decree is a provision that elaborates and supports the Indonesia code to
be applied to state-owned enterprises regardless of size, listing or type. Article 2 of
the Decree reveals that all companies owned by the state have an obligation to use the
code as a basic operational supplement of the companies.28 To put a comment on it,
we are perplexed by the article because it assumes the code to be a mandatory
provision; no state-owned enterprises can ignore the code 29 without providing any
legal sanctions that will be applied to the ignored companies. By this it means that
Indonesia applies voluntary model that has to comply with all of state-owned
enterprises.

III.III The Current Conditions

27
Article 1 paragraph 1 of Law No. 19 of 2003

28
Article 2 of the Decree

29
Kamal, Good Corporate Governance dan Pengadilan, (2004) Republika Newspaper

11
The current conditions corporate governance of Indonesian can be learnt from surveys
conducted by independent institutions. For example, on September 25, 2007 CLSA
Asia-Pacific, Asia’s leading, independent brokerage and investment group in
conjunction with the Asian Corporate Governance Association launched their
Corporate Governance Watch 2007 (the fourth survey of corporate governance in
Asia). The report disclosed that, in the country rankings, Indonesia ranked the lowest
of the Asian countries. The first rank was Hong Kong, followed by Singapore and
India in third position. 30 Previously, in June 2006, the Political and Economic Risk
Consultancy’s survey on perception of corporate governance standards amongst Asian
countries revealed that Indonesia was ranked 10 of 12 the surveyed countries with a
score of 7.5. 31

The above surveys might be reflecting the current condition of some Indonesian state-
owned enterprises. As provided by the Minister for State-owned Enterprises, during
2007 there were 28 Indonesian state owned-enterprises showed a bad performance
and had a financial lost in the amount of 2.94 trillion rupiahs. 32 Likewise, a study
conducted by Indonesian Corruption Watch (“ICW”) discovered that during 2004-
2006 there were indication of corruption about 10.484 trillion rupiahs in some

30
CLSA, Media Release: CLSA Launches Corporate Governance Watch 2007, (25 September 2007)
<http://www.calyon.com/news/corporate-investment-bank/press-releases-
200774/$File/CLSA%20Launches%20Corporate%20Governance%20Watch%202007_25092007_FIN
AL_.pdf> at 22 April 2008

31
EDB Singapore, Perceptions of Corporate Governance Standards,
<http://www.sedb.com/edb/sg/en_uk/index/why_singapore/singapore_rankings.html> at 17 September
2007

32
DetikFinance, Total Kerugian BUMN Ditargetkan Turun 92% di 2008,
<http://www.detikfinance.com/index.php/detik.read/tahun/2008/bulan/04/tgl/20/time/121520/idnews/9
26177/idkanal/4> at 24 April 2008

12
Indonesian state-owned companies. 33 The ICW’s study was then strengthened by the
finding of the Audit Board of Republic Indonesia (“BPK”), in which during 2007-
2008 there was indication of corruption in PT. TASPEN in the amount of 98 billion
rupiahs. 34

Moreover, three other cases of state-owned enterprises i.e. PT Jamsostek, 35 PT Pupuk

Kaltim 36 and Television Republic of Indonesia 37 can be additional evidence that
Indonesian state-owned enterprises are now really facing thorny problems where
former President Director of the companies were arrested and judged before court for
allegation of corruption. Suffice it to mention that the surveys’ outcomes are in line
with the conditions of some Indonesian state-owned enterprises.

IV DISCUSSION

Depart from both surveys and findings above-mentioned it might be fair to say that
the quality of Indonesia’s corporate governance, including in the sector of state-
owned enterprises is poor. Scholars have put forward a number of factors of why it
has happened includes “legal culture” factor, “lack of law enforcement”, “reception of

33
Koordinasi, Monitoring, dan Evaluasi, Rp 10 Triliun, Indikasi Korupsi di BUMN,
<http://kormonev.menpan.go.id/ebhtml/joomla/index.php?option=com_content&task=view&id=1217
&Itemid=2> at 22 April 2008

34
DetikFinance, Dana Bodong di Mandiri, Taspen Akan Diaudit Menyeluruh,
<http://www.detikfinance.com/index.php/detik.read/tahun/2008/bulan/04/tgl/21/time/074127/idnews/9
26380/idkanal/5> at 25 April 2008
35
Tempo Interaktif, Bekas Dirut PT Jamsostek Dijemput Aparat di Bandara, 10/07/2005 <
http://www.tempointeractive.com/hg/nasional/2005/07/10/brk,20050710-63697,id.html > at 25 October
2008

36
Kapanlagi.com, Majelis Hakim Tolak Eksepsi Dirut Pupuk Kaltim, 20/11/2006, <
http://www.kapanlagi.com/h/0000144465.html> at 25 October 2008

37
Suara Pembaruan, Mantan Dirut TVRI Ditangkap, 26/5/2008, <
http://www.suarapembaruan.com/News/2008/05/26/index.html> at 25 October 2008

13
corporate governance”, 38 “corporate transparency and disclosure”, “the independence
of independent directors”, “the nature of Indonesian culture”, “lack of institutional
capacity in key financial sector regulatory agencies and the judicial system”,
“ineffective judiciaries”, “widespread corruption”, “a relative lack of trained and
qualified personnel for legal enforcement”, and “countries legal heritage”. 39

From the scholars’ perceptions, the factors could be split into four types, namely
governance factor, culture, corruption and law. Not ignoring the other factors, the
corruption and law are most serious elements that should be put in priority in order to
solve the corporate governance’s problems. In essence, restoring the quality of
Indonesian state-owned enterprises’ corporate governance should concentrate on these
factors.

The corruption practices in the state-owned enterprises tell us that there are now
corporate spivs prevailing in such companies. It supposes the corporate spivs cannot
be eradicated by applying the voluntary model since it does not provide any legal
sanctions for the spivs. Yet, under the voluntary model, only an administrative
punishment can be employed given that he or she perpetrates a corruption that
disadvantages a company.

Admittedly, Indonesia’s anti-corruption law can be applied to punish corporate spivs

in Indonesian state-owned enterprises but it, in the perspective of law, remains
problem where the voluntary model would be a preventing factor in the effort of law
enforcement on this issue. The corporate spivs have legally opportunity to try to avoid
the execution of the anti corruption law by stating that the company’s case is nothing
to do with the anti-corruption law. For example, a company’s president director stand

38
Daniel, above n 17 357

39
Rosser, ‘The Political Economy of Corporate Governance in Indonesia’ in Leong (ed) Reforming
Corporate Governance in Southeast Asia: Economic, Politics, and Regulations (2005) 182-185

14
accused of corruption by the Corruption Eradication Commission, and then the
accused would make a plea of not guilty by arguing that the case cannot be
categorized as a corrupt practice because he or she has run the company well under
the principles of corporate governance. In other words, corporate spivs would contend
that the anti-corruption law is not relevance to the company’s cases as long as they
run the company in accordance with the code of corporate governance.

This is a legal loophole that can be difficult for the commission to enforce the anti
corruption law in the state-owned enterprises. So, the government should plug the
existing loophole. It suggests that the effort to close the existing loophole should be
undertaken by applying the mandatory model. A twofold advantages could be reached
from the applying the particular model. One, the mandatory model can complement
the anti corruption law and two, simultaneously the corporate spivs will be frightening
as they will not have way to escape from the legal sanctions on their misbehaviour.

In addition, Indonesia can consider the US’s predominant argument of why it has
implemented the mandatory model. It can be read from the SEC’s commissioner’s
speech who states the goal of the execution of mandatory system in America is to
force a company management to run the company well because the SOX provides
both civil and criminal sanctions if he or she does wrong, 40 which means, from
American’s perspective, the implementation of mandatory model in fact is to frighten
corporate spivs.

Apart from the above reasoning, the proposal to execute the mandatory model to
Indonesia is supported by Indonesian Corruption Eradication Commission’s
performance. The commission is new hope in the field of law enforcement in
Indonesia, particularly in the area of anti corruption. No doubt that since its

40
Akins, above n 15

15
establishment 5 years ago 41 the commission has showed a good performance that has
resulted in the Indonesia’s Corruption Perception Index has increased from 2.3 (2007)
to 2.6 (2008). According to the surveyed institution, Transparency International,
Indonesia increased in the score because the surveyed respondents appreciated the
commission’s achievements to enforce law re anti corruption in Indonesia. 42 It
supposes that the implementation of mandatory model would be workable solution as
it supported by the commission.
V CONCLUDING REMARK

This article has attempted to describe the models of corporate governance and
provided that the quality of Indonesia’s corporate governance includes in the sector of
state-owned enterprises is poor. In terms of the model, there are two models of
corporate governance, which is made up voluntary and mandatory models. Indonesia
uses the voluntary model.

It is not saying that the American mandatory model is better than the other but in the
context of Indonesian state-owned enterprises the model is suitable to be
implemented. The existing of corporate spivs and new hope of the Indonesian
Corruption Eradication Commission are the article’s central arguments to suggest
employing the mandatory model. It should be kept in mind, by applying this model
the corporate spivs will be surrounded by the law, law of corporate governance and
anti corruption law means no way for the spivs to escape from the punishment.

From the model perspective, the ongoing corporate governance model of Indonesian
state-owned enterprises is not on the right track.

41
The Indonesian Corruption Eradication Commission was established in 2003 by way of Law No. 30
of 2002

42
KPK, News: Indonesia Moves up in the Corruption Perception Index,
<http://www.kpk.go.id/modules/news/article.php?stoyid=2928> at 2 November 2008

16
Last but not least, it might be assumed if Indonesia starts to employ the mandatory
model from today on, along with the anti-corruption law the system would start to get
rid of the enterprises’ viruses and optimistically by 2028 all of Indonesian state-
owned enterprises would be good companies and profitable business entities, then
they will be one of the pivotal state actors to realize the Indonesian communities’
welfare.

17