draft good corporate governance.pdf

7/27/2019 DRAFT Good Corporate Governance.pdf

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Good Corporate

Governance

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


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Good People do not need laws to tellthem to act responsibly while bad

people will find away around thelaws.

PLATO


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Good Corporate Governance (GCG)

GCG is the key to successful growth for long termbenefits and to win the global competition. And, Theeconomic crisis in Asia and Latin America is believedwas due the failure in implementing GCG (Daniri,2005).

In 1999, Indonesia the slowest country to recoverfrom the financial crisis in East Asia. It was NOT thecompetition among countries but rather the

competition between the corporations in thosecountries. So, it was really depended upon the ablitiesof those corporations in the respected countries.(Moeljono, 2005).


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Stewardship theory and Agency theory(Chinn,2000; Shaw,2003).

Stewardship theory - based upon the philosophicalbeliefs that human is trustworthy, capable to act withresponsibilities, honesty and integrity to each other.Inthis theory management can be fully trusted to actfor the stakeholders interest as well as the public

Agency theory (Johnson,1998), - that managementas the Agents of the shareholders, acts consciously

for their own behalf, not for the interest ofshareholders. The Agency theory is more acceptablesince it is closely reflecting the reality


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Good corporate governance (GCG)

defined as a system that manages andcontrol the company to create addedvalues for all stakeholders

(Monks,2003). The right of shareholders to get the right

information timely

The obligation of the company to give accuratedisclosure timely, and transparently on allinformation regarding performance, ownershipand stakeholders.


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Corporate governance

Enhancing organizational performance

through supervision or monitoring ofmanagement performance and accountibilityto the stakeholders based upon the rules andregulations

peningkatan kinerja perusahaan melalui supervisiatau pemantauan kinerja manajemen dan adanyaakuntabilitas manajemen terhadap pemangkukepentingan lainnya, berdasarkan kerangka aturan

dan peraturan yang berlaku


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Corporate Governance

A system of checks and

balances between theboard, management andinvestors to produce anefficiently functioningcorporation, ideally geared

to produce long-termvalue

The Conference Board

Corporate governance is afield in economics that

investigates how tosecure/motivate efficientmanagement of corporationsby the use of incentivemechanisms, such ascontracts, organizational

designs and legislation. This is often limited to thequestion of improvingfinancial performance, forexample, how the corporateowners can secure/motivatethat the corporate managerswill deliver a competitive rateof return. (Mathiesen, 2002)


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"Corporate Governance isconcerned with holding the

balance between economicand social goals and betweenindividual and communalgoals. The corporategovernance framework isthere to encourage the

efficient use of resources andequally to requireaccountability for thestewardship of thoseresources. The aim is to alignas nearly as possible theinterests of individuals,

corporations and society" (SirAdrian Cadbury in 'GlobalCorporate GovernanceForum', World Bank, 2000)

Corporate governance isabout how companies are

directed and controlled. Goodgovernance is an essentialingredient in corporatesuccess and sustainableeconomic growth. Researchin governance requires an

interdisciplinary analysis,drawing above all oneconomics and law, and aclose understanding ofmodern business practice ofthe kind which comes fromdetailed empirical studies in a

range of national systems.- Simon Deakin, RobertMonks Professor of CorporateGovernance


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"Corporate Governance isconcerned with holding the

balance between economicand social goals and betweenindividual and communalgoals. The corporategovernance framework isthere to encourage the

efficient use of resources andequally to requireaccountability for thestewardship of thoseresources. The aim is to alignas nearly as possible theinterests of individuals,

corporations and society" (SirAdrian Cadbury in 'GlobalCorporate GovernanceForum', World Bank, 2000)

Corporate governance is themethod by which a

corporation is directed,administered or controlled.Corporate governanceincludes the laws andcustoms affecting thatdirection, as well as the goals

for which the corporation isgoverned. The principalparticipants are theshareholders, managementand the board of directors.Other participants includeregulators, employees,

suppliers, partners,customers, constituents (forelected bodies) and thegeneral community. -Wikipedia


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Components of GCG

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

Fairness,

Transparency,Accountability,

Responsibility.


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GCG PRINCIPLES

1. Transparency(keterbukaaninformasi), yaitu keterbukaan

dalam melaksanakan prosespengambilan keputusan danketerbukaan dalammengemukakan informasi materiildan relevan mengenaiperusahaan.

2.Accountability(akuntabilitas), yaitukejelasan fungsi, struktur, sistem,dan pertanggungjawaban organperusahaan sehingga pengelolaanperusahaan terlaksana secaraefektif.

3. Responsibility(pertanggungjawaban), yaitukesesuaian (kepatuhan) di dalampengelolaan perusahaan terhadapprinsip korporasi yang sehat sertaperaturan perundangan yangberlaku.

4.Independency(kemandirian), yaitusuatu keadaan dimana perusahaan

dikelola secara profesional tanpabenturan kepentingan dan pengaruh/ tekanan dari pihak manajemenyang tidak sesuai dengan peraturandan perundangan-undangan yangberlaku dan prinsip-prinsip korporasiyang sehat.

5. Fairness (kesetaraan dan kewajaran),yaitu perlakuan yang adil dan setaradi dalam memenuhi hak-hakstakeholderyang timbul berdasarkanperjanjian serta peraturanperundangan yang berlaku.


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The Importance of Internal & External Controls and Auditto Sound Corporate Governance

The external audit

Report toboards audit

committee

Importance of independent, external auditor iscommunicated throughout the company

Independence must be real: no/limited non-audit services

At minimum, rotation of external

audit partner

Managementletter issued

The internal audit

Direct reporting to theboards audit committee

Independent

Internal controls

Monitors compliance with corporate

governance rules, regulations,codes and policies


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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


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Current status on corporategovernance

Insistence on forms and structures

Overarching regulations

Regulatory overkill

Lack of adequate number of strong, independentdirectors

Large liabilities for companies and officers

Has the pendulum swung too far?

For the first time in the decade-long history of the Index ofEconomic Freedom, the U.S. is no longer among the top ten

most free countries

Wall Street Journal and the Heritage Foundation Index ofEconomic Freedom


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Governance and performance

Good governance leads to good performance It creates an open and transparent system

It improves communication and breaks downsystematic barriers to flow of information

Good governance allows decision making based ondata. It reduces risk

Good governance helps in creating a brand andcreates comfort for all stakeholders and society


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Does performance depend ongovernance

Medium to long term performance requiresgovernance

Most companies which have grown in the last 25years have outstanding performance and have goodgovernance structure

A good governance structure treats all stakeholdersfairly

Governance alone cannot ensure performance


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Governance and Performance -issues

Is governance a luxury that can be afforded only bythe performing companies?

Do strategies and tactics need to change toaccommodate governance with performance?

Is there a time-lag between governance andperformance?

Are stakeholders concerned about performance orpromised performance ?


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Governance and Performancemeasurement - issues

Is governance behavior motivated by legislation?

Do standards vary with jurisdictions or do you adopt thebest option?

Do you choose the right thing to do irrespective ofwhether its mandatory or not?

Is performance evaluation limited to valuation metrics?

Is it only ROE, Net margin, growth, shareholder wealthcreation?

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 governancerequirements?

Do we need market research for governancerequirements?


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Greater emphasis on leadershipby example

Boards are returning to basicvalue systems

Each culture should look back toits roots for value systems

Strengthening

the moral fiberof the

corporation

Strengthening

the moral fiber

of the

corporationValue systems are helpingbuild corporate governanceframework for companies

Boards are redefining valuecreation

Not merely increase in stock

prices

What is the Current Status on Corporate Governance Practices?


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Indonesia

Survey by Booz-Allen (1998) indicated that Indonesia

had the lowest GCG index in East Asia: 2,88, muchworse than Singapore (8,93), Malaysia (7,72) andThailand (4,89).

McKinsey & Co (2000) found out that:

The majority of the values of the companies in thestock exchange before the 1998 crisis wereovervalued.

It was suspected that there were dishonesties in thecapital market

Values were based on growth expectation rather thancurrent earning stream.


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Investing in Corporate Governance

Companies need to invest in good governance

Corporate governance has a direct bearing on businessperformance 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

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