Overview Concept of

Corporate Governance and

Corporate Governance
Practice in Indonesia
The Free Market System and
Business
The Free Enterprise System and
Capital Markets
• Free enterprise system has transformed
private ownership of businesses to
dispersed public ownership of corporate
shares
• Busines play an important role in creating
safe, efficient, and competitive capital
markets to ensure economic growth, low
costs of capital, enterpreneurship,
innovation, and job creation
The Free Enterprise System and
Capital Markets
• Investor protection in providing the most
cost-effective capital is essential to the
survival and competitiveness of capital
markets
– Protected through appropriate regulations,
effective corporate governance, and optimal
market mechanisms
• Responsibility of all participants, including
investors, corporations, regulators,
government entities, and society at large
The Free Enterprise System and
Capital Markets
• The Wealth of Nations (Adam Smith,
1776)  free and competitive market
economy enables corporations to
efficiently and effectively use socisety’s
resources in creating value, and market
mechanisms prevent corporations from
abusing their power and defrauding their
stakeholders
The Free Enterprise System and
Capital Markets
• Recent financial scandals prove that
market mechanisms by themselves may
not be adequate to monitor, control, and
discipline business affairs, and corporate
governance reforms were needed to
correct the perceived failures of market
mechanisms
 The Role and Responsibility of
Business Society
• Corporations are viewed as creators of value
for all concerned stakeholders
• Corporations obtain their financial capital,
labor capital, and skills (managerial capItal)
from their stakeholders, conduct value-added
activities, and return sustainable and
enduring value to their stakeholders
• All stakeholders contribute to the successful
operation of corporations in creating value
 The Role and Responsibility of
Business Society
• The primary mission of public companies is
regarded as creating enduring value, and the
corporate governance structure is designed to
ensure the accomplishment of the mission
• The mission of corporate governance:
– Value creation  shareholder value creation and
enhancement through the development of long-term
strategies to ensure sustainable and enduring
operational performance
– Value protection  accountability of the way the
company is managed and monitored to protect the
interests of shareholders and other stakeholders
 The Role and Responsibility of
Business Society
• The First Tier: Investors
– Shareholders are the primary stakeholders
– Many argue that the primary purpose of the
company is to maximize shareholder wealth
– Corporate governance and reforms are aimed
at protecting shareholders rights
 The Role and Responsibility of
Business Society
• The Second Tier: Creditors
– Ownership structure: debt and equity
– Debt holders demand some control over
managerial actions by entering into debt
covenant contracts designed to protect their
interests and determine whether breaches of
contractual provisions have occured
 The Role and Responsibility of
Business Society
• The Third Tier: Others
– Employees, suppliers, customers,
government, community, and society
– Communication with all stakeholders is
central to improving decision-making
processes, strengthening relationship,
gathering important information, and building
an accord among dissimilar views
The Role of Financial Information
in The Capital Markets
• The sustainability and financial health of
public companies, public trust, and
investor confidence in financial reports
plays a crucial role in the integrity and
efficiency of the capital market and the
economic growth and prosperity of the
nation
The Role of Financial Information
in The Capital Markets
• Reliability, accuracy, and transparency of
financial information play a vital role in the
efficiency, integrity, and safety of capital
markets
– The role of individuals involved in the
corporate financial reporting supply chain
(board of directors, the audit committee,
maagement, auditors)
– Financial disclosure
The Role of Financial Information
in The Capital Markets
• Accurate financial information assists
investors with making informed, aound
investment decisions
• High-quality financial information improves
investor decisions, and in turn, efifciency,
liquidity, and safety of the capital markets,
which may result in prosperity and
economic growth for the nation
The Role of Financial Information
in The Capital Markets
• Four key gatekeepers:
– Independent and competent board
– Independent and competent external auditors
– Objective and competent legal counsel
– Objective and competent financial advisors
and investment bankers
 Introduction to Corporate
Governance
• Corporate governance has gained
renewed interest and relevance in recent
years and is now emerging as a central
issue within public companies
 Introduction to Corporate
Governance
• Effective corporate governance ensures
corporate accountability, enhances the
reliability and quality of public financial
information, enhances the integrity and
efficiency of the capital market, and thus,
improves investor confidence
• Corporate governance is ultimately about
leadership and accountability
 Corporate Culture and Integrity
• Corporate culture is continuously affected by its
leadership in setting a ‘right tone at the top’ and
is often informal in establishing powerful norms
and standards that influence behavior
• Compliance culture requires the establishment
and implementation of proper programs,
policies, and procedures to effectively comply
with applicable regulations, standards, and best
practices
– Ethical culture
 Corporate Accountability
• The multiple bottom lines (MBL) objectives
of economic, social, ethical, and
environmental performance
Corporate Governance
 Definition
• There is no universally accepted definition
of corporate governance
• Existing definitions of corporate
governance fall along a spectrum:
– ‘Narrow’ views  restricted to relationship
between a company and its shareholders
– ‘Broader’ views  relationship between a
company and its stakeholders
 Definition
• Rezaee (2009):
– Corporate governance is the process affected by
a set of legislative, regulatory, legal, market
mechanisms, listing standards, best practices,
and efforts of all corporate governance
participants, including the company’s directors,
officers, auditors, legal counsel, and financial
advisors, which creates system of checks and
balances with the goal of creating and enhancing
enduring and sustainable shareholder value,
while protecting the interests of other
stakeholders
 Definition
• OECD - Organization for Economic Co-
operation and Development:
Corporate Governance is the system by which
business corporations are directed and
controlled
– The Corporate Governance structure specifies the distribution of
the right dan responsibilities among different participants in the
corporation, such as the board, managers, shareholders, and
other stakeholders, and spells out the rules and procedures for
making decisions on corporate affairs.
– By doing this, it also provides this structure through which the
company objectives are set, and the means of attaining those
objectives and monitoring performance
 Aspects of Corporate
Governance
• 3 aspects of corporate governance
examined:
– Shareholder aspect
– Stakeholder aspect
– Intergrated aspect
 Shareholder Aspect
• The shareholder aspect of corporate
governance is based on the premise that
shareholders provide capital to the
corporation that exists for their benefit
– Support agency theory
 Agency Theory
• Agency relationship is a contract under
which one or more persons (principal(s))
engage another person (agent) to perform
some service on their behalf which
involves delegating some decision making
authority to the agent.
 Agency Problem
• The essence of agency problem is
separation of ownership and control
• Principal have difficulties in assuring that
their funds are not expropriated or wasted
on unattractive projects
 Conflict of Interests

• Insiders have an information advantage over

other parties (i.e. outsiders).
– Insiders: Management, Majority Stockholders
– Outsiders: Creditors, Minority Stockholders,
Government, Employees, Public
• These parties pursue their own interests (i.e.,
self interest), which can be conflicting
• As a result, the parties whose action is
unobservable tend to shirk (i.e., insiders), which
is detrimental to the other parties
 Stockholder-Manager Conflicts
• The self-interested behavior of managers
may be at conflict with the interest of
stockholders.
• Managers may favor growth and larger
size of the firm:
– Greater job security
– Larger compensation
– Greater prestige
– Larger discretionary expense accounts
 Stockholder-Manager Conflicts
(Cont’d)
• Consumption of excessive perquisites.
– Direct benefits: use of company car, expense
accounts.
– Indirect benefits: up-to-date office decor.
• Shirking
– They may not put forth their best efforts.
 Stockholder-Manager Conflicts
(Cont’d)
• Principal and agent sign a contract that
specifies what the manager does with the
funds, and how the returns are divided
between them.
• The problem is: complete contracts are
infeasible.
• As the consequence, the manager ends
up with substantial control rights.
 Agency costs
 Shareholder Aspect
• Corporate governance is designed to
reduce the agency costs and align the
interests of management with those of
investors
 Stakeholder Aspect
• Focuses on the broader view of the
company as the nexus of contracts among
all corporate governance participants with
the common goal of creating value
– Concentrates in the maximization for all
stakeholders
 Integrated Aspect
• The primary goal of corporate governance
is not simply to reduce agency costs, but
to create a right balance of power sharing
among all corporate governance
participants driven by the responsibility to
create and enhance long-term shareholder
value while protecting the interests of
other stakeholders
Corporate Governance Structure
• There is no globally accepted corporate
governance structure
– Nature of cultural, social, legal, regulatory,
business, and economic systems
 Corporate Governance
Principles
• OECD (2004) Principles:
– Ensuring the basis for an effective corporate
governance framework
– The rights of shareholders and key ownership
functions
– The equitable treatment of shareholders
– The role of stakeholders in corporate governance
– Disclosure and transparency
– The responsibilities of the board
 Corporate Governance
Principles
• Corporate governance structure should be
developed based on the following principles:
– Value-adding philosophy
– Ethical conduct
– Accountability
– Shareholder democracy and fairness
– Integiry of financial reporting
– Transparency
– Independence
 Corporate Governance
Functions
• Oversight
• Managerial
• Compliance
• Internal Audit
• Advisory
• External audit
• Monitoring
 Corporate Governance
Functions
• Oversight
– Board of directors  fiduciary duty of
overseeing the managerial function in the best
interests of the company and its shareholders
• Managerial
– Management  run the company and anage
its resources, operations, and disclosures of
relevant and reliable financial and
nonfinancial information
 Corporate Governance
Functions
• Compliance
– A set of laws, regulations, rules, standards,
and best practices developed by state and
federal legislators, regulators, standard-
setting bodies, and professional organizations
– To create a compliance framework
 Corporate Governance
Functions
• Internal audit
– Provides both assurance and consulting
services to the company
• Legal and financial advisory
– Provides legal advice and financial advice
• External audit
– Lend credibility to the company’s financial
reports
 Corporate Governance
Functions
• Monitoring
– Exercised by shareholders, particulary
institutional shareholders, who are
empowered to elect and, if warranted, remove
directors
– Other stakeholers can also affect corporate
policies and practices
 Corporate Governance
Mechanisms
• Internal and external governance
mechanisms
– Internal:
• BOD, particulary independent directors
• Audit comittee
• Management
• Internal controls
• Internal audit functions
– External
 Corporate Governance
Mechanisms
• Internal mechanisms
– BOD, particulary independent directors
– Audit comittee
– Management
– Internal controls
– Internal audit functions
 Corporate Governance
Mechanisms
• External mechanisms
– Capital market
– Market for corporate control
– Labor market
Framework of Corporate
Governance
 Corporate Governance Mechanism :
The Internal and External Architecture
Internal External

Private Regulatory
Pemegang Saham Stakeholders Standards
(for example, accounting
•Employees and auditing)
RUPS •Customers
Laws
•Suppliers
•Creditors Regulations
•Society
Dewan Komisaris
Bank
Reputational agents
Dewan Direksi • Accountants
• Lawyers
• Credit rating
• Investment bankers Markets
Management • Financial media • Capital market
• Investment advisors • Labor market
•Internal Auditor • Research
•Accounting • Corporate Governance • Product market
analyst

Source : Modification from Corporate Governance : A Framework for Implementation, Cadburry, 1999
& Corporate Governance, Kim & Nofsinger, 2004

Penguatan Governance harus melibatkan berbagai pihak baik internal perusahaan maupun eksternal dalam
konteks pengendalian Board sehingga pencapaian tujuan perusahaan tetap konsisten.
 Sources of Corporate
Governance
• Corporate laws
• Securities laws
• Listing standards
• Best practices
Corporate Governance Reforms
• SOX in 2002
 CG di Indonesia
• Pada tahun 1999, Komite Nasional Kebijakan
Corporate Governance (KNKCG) dibentuk
berdasarkan Keputusan Menko Ekuin Nomor:
KEP/31/M.EKUIN/08/1999
• Pada bulan November 2004, Pemerintah
dengan Keputusan Menko Bidang
Perekonomian Nomor:
KEP/49/M.EKON/11/2004 telah menyetujui
pembentukan Komite Nasional Kebijakan
Governance (KNKG) yang terdiri dari Sub-
Komite Publik dan Sub-Komite Korporasi
– Menggantikan KNKCG
 CG di Indonesia
• KNKG:
– Telah mengeluarkan Pedoman Good
Corporate Governance (GCG)
• Pertama kali tahun 1999, kemudian
disempurnakan tahun 2001, dan terakhir tahun
2006
– Pada awal tahun 2004 juga telah
mengeluarkan Pedoman GCG Perbankan
Indonesia dan pada awal tahun 2006
mengeeluarkan Pedoman GCG
Perasuransian Indonesia
 CG di Indonesia
• Pasar Modal:
– Bapepam-LK telah mengeluarkan berbagai
regulasi terkait GCG
• Komisaris independen
• Komite audit
• Pedoman Penyajian dan Pengungkapan Laporan
Keuangan Emiten dan Perusahaan Publik
 CG di Indonesia
• Perbankan:
– PBI No. 8/4/PBI/2006 mengenai Pelaksanaan
Good Corporate Governance bagi Bank
Umum
• BUMN:
– Kep Menteri BUMN No: KEP-117/M-
MBU/2002 tentang Penerapan Praktek Good
Corporate Governance pada Badan Usaha
Milik Negara (BUMN)
 Corporate Governance Rating
• Investor focus on corporate governance
generated a demand for and interest in the
development of rating metrics or systems
that gather, analyze, rank, and compare
corporate governance practices of public
companies
Corporate Governance Reporting
• CGR should:
– Disclose all relevant information about the
company’s corporate governance
– Focus on the company’s sustainability
performance
– Provide transparent information about
performance and its impacts on all
stakeholders
– Assess the company’s responsiveness to the
needs of its stakeholders
McKinsey Survey
McKinsey Survey
McKinsey Survey
IICD CG Scorecard – 2005
OECD Principles Mean Score (%)
Rights of Shareholders 51.23
Equitable Treatment of Shareholders 83.02
Role of Stakeholders 58.76
Disclosure and Transparency 66.64
Responsibilities of the Board 52.36
Overall Mean Score 61.26
 IICD CG Scorecard
Category Mean Score Mean Score
(%) (%)
2005 2004
SOEs 74.63 76.38
Banking 70.70 74.91
Overall 61.26 67.29
 IICD CG Scorecard
• Two major factors contribute to the
decrease, which are:
– The second study involved all listed
companies while the first study only involved
firms that are/have been included in the LQ-
45 Index. Firms in the LQ-45 Index have
higher score than other companies.
– The second study employed more stringent
instrument than the first study.
 IICD CG Scorecard
(Same Subject Companies)
Category Mean Score Mean Score
(%) (%)
2005 2004
SOEs 76.51 76.38
Banking 78.00 74.91
Overall 69.50 67.29
CLSA – Score CG 2003
CLSA – CG Score 2005 & 2007
 Transparency International -
Corruptions Perception Index (CPI)