Abstract
The weak corporate governance framework in Indonesia, as in other countries in Southeast Asia, was deemed a crucial factor in deepening the financial and economic crisis in the late 1990s. Over a decade after the 1997 Asian financial crisis, Indonesia and other Southeast Asian countries have made substantial governance reforms. The reform measures of the institutional framework, both in the public and corporate sectors, were intended to transform Indonesia into a clean, transparent, and accountable country. While the reforms have resulted in increased political stability, improved government effectiveness, and a more conducive investment climate, corruption remains a major concern in Indonesia. This study aims to evaluate how corporate governance mechanisms can reduce the opportunities for corruption. By utilizing agency theory, we argue that a strong corporate governance institutional framework helps to reduce a country’s level of corruption. We focus attention on three components of corporate governance mechanisms, i.e., shareholder rights, the quality of the board of directors (BoD), and appropriate accounting and auditing standards, including transparency standards. In an attempt to strengthen corporate governance standards and practices in Indonesia, we conducted a comparative study among Southeast Asian middle-income countries, i.e., Indonesia, Malaysia, and Thailand. We rely on accessible secondary data such as corporate governance codes, laws, and regulations. Our study concludes that the Indonesian corporate governance institutional framework is less stringent compared to Malaysia and Thailand. This condition provides a favorable environment for corruption to persist because the standards and practices are less demanding and the companies do not necessarily have to comply with the existing regulatory framework.
The first author is the original researcher and serves as the author for correspondence, the remaining authors are promoters and supervisors listed in alphabetical order who also have contributed to this chapter.
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Notes
- 1.
Several laws have been introduced to tackle corruption such as Law No. 31 of 1999 on Eradicating Criminal Acts of Corruption as amended by Law No. 20 of 2001, Law No. 28 of 1999 on State Officials who are Clean and Free of Corruption, Collusion, and Nepotism, and Law No. 15 of 2002 on Criminal Acts of Money Laundering.
- 2.
NCCG was established under a Ministerial Decree from the Coordinating Minister for the Economy, Finance and Industry No. KEP-31/M.EKUIN/06/2000. Then, in 2004 the NCCG was transformed into the National Committee on Governance (or KNKG), composed of the Public Governance Sub-Committee and the Corporate Governance Sub-Committee under a Ministerial Decree No. KEP-49/M.EKON/11/2004.
- 3.
In an attempt to enhance the enforcement of law process, at the end of 2003 the government established the Indonesian Corruption Eradication Commission (or “KPK”), an independent body which has special authorities to prevent, combat, and prosecute acts of corruption. The KPK has made significant performance since its establishment. Between 2004 and 2012, the KPK handled 283 corruption cases involving a total of 337 politicians, government officials, local leaders, and private sector executives (KPK 2012 Annual Report).
- 4.
In this paper, we do not consider the enforcement of law. It might be possible that strong regulations do not necessarily imply a good implementation in practice.
- 5.
Corporate sustainability is a concept which integrates the role of corporations not only in terms of corporate economic activities but also in the environmental and societal goals (van Marrewijk 2003; Berger et al. 2007). In other words, corporations have a responsibility to create financial profits for the shareholders on the one hand, and on the other hand, they contribute to the well-being of stakeholders, including society and the environment. It is also known as the triple-bottom-line notion (Hubbard 2009; Painter-Morland 2006).
- 6.
Corporate governance code generally consists of principles and standards which are voluntary with regard to its implementation; it defines the structure and mechanism how corporations are governed. According to the Financial Reporting Council (2012), the code is not a rigid set of rules, and corporations are not necessarily strictly bound by the code. Thus, it is contrary to laws and regulations which impose mandatory rules including enforcement.
- 7.
The legal framework here refers to those issued until December 31, 2013.
- 8.
The World Bank classifies the low-/middle-/high-income economies based on their Gross National Income (GNI) per capita. For the year 2013, low-income economies are defined as countries with GNI per capita ≤US$1045; middle-income economies between US$1046 and US$12,745; and high-income economies ≥US$12,746 (http://data.worldbank.org/about/country-classifications/a-short-history).
- 9.
Badan Pengawas Pasar Modal dan Lembaga Keuangan (Bapepam-LK). http://www.bapepam.go.id/pasar_modal/index.htm. Since January 1, 2013, the role of Bapepam-LK has been replaced by the Indonesia Financial Services Authority or Otoritas Jasa Keuangan (OJK) - http://www.ojk.go.id/en/. The process of transition from Bapepam-LK to OJK, however, takes about one year. All capital market regulations in this article are based on those set by Bapepam-LK.
- 10.
Stock Exchange of Thailand. http://www.set.or.th/en/.
- 11.
Komite Nasional Kebijakan Governance (KNKG). http://knkg-indonesia.com/home/.
- 12.
Minority Shareholders Watchdog Group. http://www.mswg.org.my/.
- 13.
We had tried to search any information regarding the ISSI; however, we did not obtain the ISSI’s web site and news about its activities.
- 14.
- 15.
Bursa Malaysia. http://www.bursamalaysia.com/market/listed-companies/.
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Wijayati, N., Hermes, N., Holzhacker, R. (2016). Corporate Governance and Corruption: A Comparative Study of Southeast Asia. In: Holzhacker, R., Wittek, R., Woltjer, J. (eds) Decentralization and Governance in Indonesia. Development and Governance, vol 2. Springer, Cham. https://doi.org/10.1007/978-3-319-22434-3_10
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