Good Corporate Governance

J. P. SOEBANDONO Drs (ec), S.Psi, MM, M.Si (psi)

Good People do not need laws to tell them to act responsibly while bad people will find away around the laws.
PLATO

Good Corporate Governance (GCG)

GCG is the key to successful growth for long term benefits and to win the global competition. And, The economic crisis in Asia and Latin America is believed was due the failure in implementing GCG (Daniri, 2005). In 1999, Indonesia the slowest country to recover from the financial crisis in East Asia. It was NOT the competition among countries but rather the competition between the corporations in those countries. So, it was really depended upon the ablities of those corporations in the respected countries. (Moeljono, 2005).

Stewardship theory and Agency theory

(Chinn,2000; Shaw,2003).

Stewardship theory - based upon the philosophical beliefs that human is trustworthy, capable to act with responsibilities, honesty and integrity to each other.In this theory management can be fully trusted to act for the stakeholders interest as well as the public Agency theory (Johnson,1998), - that management as the Agents of the shareholders, acts consciously for their own behalf, not for the interest of shareholders. The Agency theory is more acceptable since it is closely reflecting the reality

Good corporate governance (GCG) defined as a system that manages and control the company to create added values for all stakeholders (Monks,2003).
The right of shareholders to get the right information timely The obligation of the company to give accurate disclosure timely, and transparently on all information regarding performance, ownership and stakeholders.

Corporate governance
Enhancing organizational performance through supervision or monitoring of management performance and accountibility to the stakeholders based upon the rules and regulations
peningkatan kinerja perusahaan melalui supervisi atau pemantauan kinerja manajemen dan adanya akuntabilitas manajemen terhadap pemangku kepentingan lainnya, berdasarkan kerangka aturan dan peraturan yang berlaku

Corporate Governance
A system of checks and balances between the board, management and investors to produce an efficiently functioning corporation, ideally geared to produce long-term value Corporate governance is a field in economics that investigates how to secure/motivate efficient management of corporations by the use of incentive mechanisms, such as contracts, organizational designs and legislation. This is often limited to the question of improving financial performance, for example, how the corporate owners can secure/motivate that the corporate managers will deliver a competitive rate of return. (Mathiesen, 2002)

The Conference Board

Corporate Governance
"Corporate Governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society" (Sir Adrian Cadbury in 'Global Corporate Governance Forum', World Bank, 2000) Corporate governance is about how companies are directed and controlled. Good governance is an essential ingredient in corporate success and sustainable economic growth. Research in governance requires an interdisciplinary analysis, drawing above all on economics and law, and a close understanding of modern business practice of the kind which comes from detailed empirical studies in a range of national systems. - Simon Deakin, Robert Monks Professor of Corporate Governance

Corporate Governance
"Corporate Governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society" (Sir Adrian Cadbury in 'Global Corporate Governance Forum', World Bank, 2000) Corporate governance is the method by which a corporation is directed, administered or controlled. Corporate governance includes the laws and customs affecting that direction, as well as the goals for which the corporation is governed. The principal participants are the shareholders, management and the board of directors. Other participants include regulators, employees, suppliers, partners, customers, constituents (for elected bodies) and the general community. Wikipedia

Components of GCG
Four components of GCG concepts (Kaen, 2003; Shaw, 2003):

Fairness, Transparency, Accountability, Responsibility.

GCG PRINCIPLES
1. Transparency (keterbukaan informasi), yaitu keterbukaan dalam melaksanakan proses pengambilan keputusan dan keterbukaan dalam mengemukakan informasi materiil dan relevan mengenai perusahaan.
4. Independency (kemandirian), yaitu suatu keadaan dimana perusahaan dikelola secara profesional tanpa benturan kepentingan dan pengaruh / tekanan dari pihak manajemen yang tidak sesuai dengan peraturan dan perundangan-undangan yang berlaku dan prinsip-prinsip korporasi yang sehat. 5. Fairness (kesetaraan dan kewajaran), yaitu perlakuan yang adil dan setara di dalam memenuhi hak-hak stakeholder yang timbul berdasarkan perjanjian serta peraturan perundangan yang berlaku.

2. Accountability (akuntabilitas), yaitu kejelasan fungsi, struktur, sistem, dan pertanggungjawaban organ perusahaan sehingga pengelolaan perusahaan terlaksana secara efektif. 3. Responsibility (pertanggungjawaban), yaitu kesesuaian (kepatuhan) di dalam pengelolaan perusahaan terhadap prinsip korporasi yang sehat serta peraturan perundangan yang berlaku.

The Importance of Internal & External Controls and Audit to Sound Corporate Governance
The external audit
Importance of independent, external auditor is communicated throughout the company

The internal audit

Independent

Internal controls
Management letter issued Monitors compliance with corporate governance rules, regulations, codes and policies Report to boards audit committee

Direct reporting to the boards audit committee Independence must be real: no/limited non-audit services At minimum, rotation of external audit partner

Issues in Corporate Governance

Asymmetry of power Asymmetry of information Interests of shareholders as residual owners Role of owner management Theory of separation of powers Division of corporate pie among stakeholders

Current status on corporate governance

Insistence on forms and structures Overarching regulations Regulatory overkill Lack of adequate number of strong, independent directors Large liabilities for companies and officers Has the pendulum swung too far?
For the first time in the decade-long history of the Index of Economic Freedom, the U.S. is no longer among the top ten most free countries Wall Street Journal and the Heritage Foundation Index of Economic Freedom

Governance and performance

Good governance leads to good performance It creates an open and transparent system It improves communication and breaks down systematic barriers to flow of information Good governance allows decision making based on data. It reduces risk Good governance helps in creating a brand and creates comfort for all stakeholders and society

Does performance depend on governance

Medium to long term performance requires governance Most companies which have grown in the last 25 years have outstanding performance and have good governance structure A good governance structure treats all stakeholders fairly Governance alone cannot ensure performance

Governance and Performance issues

Is governance a luxury that can be afforded only by the performing companies? Do strategies and tactics need to change to accommodate governance with performance? Is there a time-lag between governance and performance? Are stakeholders concerned about performance or promised performance ?

Governance and Performance measurement - issues

Is governance behavior motivated by legislation? Do standards vary with jurisdictions or do you adopt the best option? Do you choose the right thing to do irrespective of whether its mandatory or not? Is performance evaluation limited to valuation metrics? Is it only ROE, Net margin, growth, shareholder wealth creation? Do performance measures need to be holistic? We need to encompass all stakeholders Governance is an enabler for holistic performance How do managers better understand governance requirements? Do we need market research for governance requirements?

What is the Current Status on Corporate Governance Practices?

Greater emphasis on leadership by example

Boards are returning to basic value systems

Each culture should look back to its roots for value systems

Value systems are helping build corporate governance framework for companies

Strengthening Strengthening the themoral moralfiber fiber of the of the corporation corporation

Boards are redefining value creation

Not merely increase in stock prices

Indonesia
Survey by Booz-Allen (1998) indicated that Indonesia had the lowest GCG index in East Asia: 2,88, much worse than Singapore (8,93), Malaysia (7,72) and Thailand (4,89). McKinsey & Co (2000) found out that: The majority of the values of the companies in the stock exchange before the 1998 crisis were overvalued. It was suspected that there were dishonesties in the capital market Values were based on growth expectation rather than current earning stream.

Investing in Corporate Governance

Companies need to invest in good governance
Corporate governance has a direct bearing on business performance and thereby ROI Leverage the power of IT

On average, businesses with superior governance practices generate 20 percent greater profits than other companies
A study based on 256 companies conducted at the MIT Sloan School of Management