Corporate governance in the Indonesian state-owned enterprises : a thesis presented in fulfilment of the requirements for the degree of Doctor of Philosophy in Development Studies at Massey University, Palmerston North, New Zealand : a thesis presented in partial fulfilment of the requirements for the degree of Doctor of Philosophy in Development Studies at Massey University, Palmerston North, New Zealand

Abstract

Concern regarding corporate governance is a new phenomenon in Indonesia. It became apparent in the business community when the economic crisis hit the country in 1997. Due to its recent recognition, it appears that very little is known about corporate governance in Indonesia and there has been no academic study conducted on corporate governance in the Indonesian Stateowned Enterprises (ISOEs) despite the fact that their performance is closely linked to the development of the country. The main objectives of this study are two-fold: first is to examine corporate governance systems and the roles of the Boards of ISOEs; and second is to assess the effectiveness of government initiatives in improving corporate governance practices in ISOEs. This study employed both qualitative and quantitative methods. The quantitative analysis was derived from numerical data obtained from government reports and other public documents. The qualitative analysis was based on the results of in-depth interviews with key individuals and other sources such as public opinions published in the mass media. Several key findings were obtained from the results of this study. Firstly, the study found that using agency theory to explain the relationships between the agents and the principals was more problematic in ISOEs than those in private enterprises. This is because an ISOE is a loose coalition of various agents with no real owner. Consequently. agency theory, if it is used to redefine the relationships among parties in ISOEs. should be approached at two different levels. At the micro level the agency theory examines the agent-principal relationships among the ISOE management, the Boards and the government-the corporate governance tripod. At the macro level it examines the agent-principal relationships between the corporate governance tripod and the ISOEs stakeholders (the public, labour unions, politicians in the People's Representative Assembly and others). Secondly, the results of this study confirm the results of previous studies which found that Boards in SOEs were largely ineffective. To enhance Boards' effectiveness, this study suggests that as a quasi-owner the government needs to reduce its intervention in ISOEs' operations and empower the Boards by establishing employee representation on the Board. In addition, Board training and assessment should be a mandatory in the ISOEs. Thirdly, this study found that the initiatives on corporate governance carried out by the Indonesian government had been ineffective due to the lack of incentives, lack of commitment and consistency, lack of understanding of corporate governance and unclear programmes. Here, the key factor required to enhance effectiveness is strong-willed commitment of the government and ISOE management. Lastly, other factors such as culture, public governance and law enforcement have a great influence in the process of attaining good corporate governance practices. Therefore, there should be joint efforts among parties in the public sector to ensure that good corporate governance is achieved in conjunction with the attainment of good public governance.