Family Capitalism and Corporate Governance of Family-controlled Listed Companies in Indonesia

Abstract

This article discusses corporate governance of family-controlled companies at two levels. At the more general level, it examines the family capitalism paradigm for corporate governance of family businesses, supplementing the managerial capitalism paradigm in Anglo-American corporate governance systems, and the alliance capitalism paradigm prevailing in the Japan and German corporate governance systems. At the more specific level, the article explores family capitalism in the Indonesian context. In particular, it focuses on the question as to how family relationships and family values can influence the corporate governance of companies listed on the Jakarta Stock Exchange (JSX). Part II of this paper discusses corporate governance of family-controlled companies and introduce the family capitalism paradigm. In Part III, I sketch the formal legislative framework of Indonesian corporate governance. Part IV undertakes an empirical study to reveal the extent of family relationships among members of the corporate boards of public companies listed on the JSX. In the absence of better alternatives, I use the somewhat rudimentary method of identifying common surnames among board members. To facilitate longitudinal comparison, I use published data for two calendar years: 1997 (prior to the onset of the 1997-1999 Asian financial crisis) and 2001 (when many Asian economies had started to recover or had already recovered from the crisis). Using this methodology, I found that 59.8% of the 259 listed companies in 1997 had two or more family board members. The figure was 40.7% out of the 307 listed companies in 2001. In Part V, I discuss the potential impact of family relationships and family values on the corporate governance of family-controlled companies in the Indonesian context. In particular, I focus on the Indonesian concept of kekeluargaan (family spirit or brotherhood) which is referred to in the 1945 Constitution. Assuming that family capitalism in Indonesia operates on an organisational logic which is influenced by family values, I highlight three aspects of corporate governance which may be affected. First, the notion of a company being a separate legal entity may be blurred. This may explain the cases of expropriation of company assets by majority shareholders in Indonesia. Secondly, personal accountability of board members may be downplayed. Thirdly, supervision and authority within the two-tier board structure of Indonesian companies may be less than optimal given a hierarchical family culture.