The Indonesian Government's Role in the Development of Corporate Social Responsibility in Indonesia

Abstract

This thesis explores the historical development of Corporate Social Responsibility (CSR) in Indonesia. Existing literature in the field is influenced by experiences in Western liberal democracies, where pressure from internal stakeholders leads to what is called a “bottom-up” approach; pressure that leads firms engaging in CSR for voluntary rather than mandated reasons. However, this research found that the adoption of CSR in Indonesia did not follow this Western trajectory. Instead, CSR developed from a “top-down” approach where the Indonesian Government acted as the key driver of change. Reflecting this, the enactment of the Company Act 2007 made Indonesia the first country in the world to explicitly require every company to undertake CSR activities. In exploring this unusual policy outcome, this research sought answers to the following research question: Do theories about CSR that stem from Western democratic societies, which typically depict the drivers of CSR activity coming from below – with the company then voluntarily devising their own strategic CSR response – apply in developing societies? In exploring answers to this question, this thesis adopts a historical approach, considering the changing role of the Indonesian government since 1945 with particular attention paid to the so-called New Order era (1965-98) and the Reformation era (1998-2015). This case study answers the questions utilising legitimacy theory, institutional theory, and stakeholder theory through analysis of relevant regulations, official statistics, document analysis interviews with key stakeholders, and analysis of company Annual Reports. This research found that at first, the Indonesian government initiated CSR activities through the policies pursued by State-Owned Enterprises (SOEs) that have occupied a disproportionately important role in the Indonesia economy. Under the New Order era, CSR policies were mainly directed towards improving economic and social outcomes in agriculture, where Small and Medium-sized Enterprises (SMEs) were the norm. As part of their activities, all SOEs were legally required to assist SMEs. The Indonesian government, both directly and indirectly, through the SOEs, was also the driver behind the extension of CSR to the local levels through measures directed towards the formation and operation of farm-based cooperatives. Under the Reformation era, however, the focus shifted to a legislative mandate. Since the issuance of Law No. 20/2008, all SOEs are required to perform social activities in accordance with the Partnership and Community Development Program or “Program Kemitraan dan Bina Lingkungan” (PKBL). As the Program’s title suggests, PKBL involves SOEs entering into “partnerships” with mostly small enterprises (mainly micro-enterprises). Since 2007, with the issuance of the Company Act, the Indonesian government has also required privately-owned firms to engage in CSR. As stated in the Indonesian Financial Accounting Standard (PSAK), all companies listed on the Indonesian Stock Exchange (IDX) must disclose their CSR activities in their Annual Reports. However, in examining the companies’ Annual Reports, this thesis found that only 401 of the 530 listed companies actually disclosed CSR activities in their Reports. Moreover, this research found that 90 percent of companies undertaking CSR activities were actually engaged in what can best considered as philanthropic forms of community development that are unlikely to have any transformative effect. Accordingly, this thesis concludes that although the Indonesian government has acted as the primary driver of CSR within the country, the benefits that are accruing at this stage are sub-optimal. This thesis found that whereas research performed in Western democratic societies has focused on the influence of salient stakeholder in CSR activities, in Indonesia the power of stakeholder may not influence the company if the company has political connections that can mitigate this stakeholder power. Less powerful stakeholders may become beneficial to the company if a stakeholder can align itself with the company’s interest, such as building their reputation or gaining local acceptance. The findings of this study contribute significantly to the extant research base on the development of CSR in Indonesia. An understanding of the Indonesian government’s social responsibility role helps fill the comparative void in the CSR historical literature dealing with developing societies.