4 Corporate Governance in Indonesia: A Study on Governance of Business Groups

Abstract

Since the high growth period praised as the “East Asian Miracle” collapsed due to the Asian economic crisis in 1997, good governance has come to be a key issue in the IMF-led reforms in the crisis-hit Asian countries. In these countries, IMF conditionality contained wide-ranging institutional reforms that were, in a word, a reform of governance of the government and corporations. In the case of Indonesia, the long-standing authoritarian regime fell during the crisis, and vigorous public hopes for democracy emphasized a need for institutional reform not only in the political sphere but also in the economic sphere. One of the key issues in economic reform is corporate governance. After the crisis, a negative view of the governance of Asian firms became widespread. The World Bank (1998) presented its view that the economic crisis could be attributed to the institutional vulnerability of the financial and corporate sectors, stating that “the poor system of corporate governance has contributed to the present financial crisis by shielding the banks, financial companies, and corporations from market discipline” (ibid, p.57). Research by World Bank economists showed that East Asian firms were characterized by high leverage, concentrated ownership, a high level of ultimate control by a few families, and the expropriation of minority shareholders, and argued that these characteristics led to weak corporate governance and impeded legal and regulatory developments.1 Based on this argument, new institutions of the AngloAmerican type, such as independent commissioners/directors, internal auditing/remuneration committees, and protection for minority shareholders, have been introduced for better corporate governance in the crisis-hit Asian countries, including Indonesia. 4 Corporate Governance in Indonesia: A Study on Governance of Business Groups