What Indonesia Needs Right Now Is Good Corporate Governance

By Sarvesh Suri on 11:40 am Feb 23, 2014
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(JG illustration)

Indonesia’s economy is facing tough challenges: a slowdown of gross domestic product growth, depreciation of the rupiah and tightening of external financing. On the political side, the country is entering a period of uncertainty with upcoming legislative and presidential elections. Moreover, under current market conditions, companies are operating in ever tougher competitive environments.

These developments challenge the attractiveness of the country’s corporates to investors. In this climate, Indonesia needs to restore foreign investors’ trust and redirect their attention to its strong fundamentals: a politically stable country with the world’s fourth largest population and a young and growing consumer base.

One fundamental step to restoring this trust and raising Indonesia’s standing as an attractive investment destination is to shore up the private sector’s corporate governance practices.

Earlier this month, Indonesian Finance Minister M. Chatib Basri rightly pointed out that during the era of easy money foreign investors tend to place their portfolios with less scrutiny. Now that Indonesia is going through a period of economic instability, investors will be more careful. They’ll analyze the business environment with a critical eye and examine the level of protection of investors’ rights and other corporate governance practices closely.

In this situation, Indonesian companies can build trust by protecting the rights of shareholders and honoring their obligations to staff, investors, suppliers and local communities. They should also institute a competent and independent board that can review management decisions effectively and make roles and responsibilities of board and management public.

At home, such good corporate governance builds trust between companies, local investors and other stakeholders. Internationally, good corporate practices send a positive signal to foreign investors that their money will be safe in Indonesian companies. Let’s not forget that Indonesia competes with other emerging market nations for a slice of global capital.

Studies confirm investors will pay a premium to own shares in well-governed companies as they tend to perform better.

In Brazil, for example, a segment of companies on the stock market, which voluntarily commit to higher corporate governance standards (called Novo Mercado, or New Market), have consistently posted larger gains and experienced less volatility over the past decade.

Similarly, the Hawkamah Institute in the United Arab Emirates launched a pan-Arab index of listed companies across the Middle East and North Africa in 2011. Its work shows that the top 10 rated companies in terms of good governance significantly outperformed the market average between 2011 and 2013.

In short, companies that practice good corporate governance advance their long-term survival and prosperity. A well-performing company with streamlined internal practices has a positive impact on private sector development. Good corporate governance builds healthy organizations and institutions and leads to sustainable economic growth. With a young population that needs jobs, it is crucial Indonesia adopts long-term ways of building and sharing prosperity among its more than 240 million people.

To do just that and place corporate governance front and center of Indonesia’s economy, the Financial Services Authority (OJK) recently launched with support from IFC, the member of the World Bank Group focused on private sector development in emerging markets, the Indonesian Corporate Governance Roadmap and Manual.

What does that mean?

The roadmap defines key principles of governance which will shape the regulatory framework for listed companies. It emphasizes transparency and seeks to strengthen the role of company boards. There is evidence to show that investors gain great confidence in companies that are more transparent and have active boards who are capable of stewarding companies effectively.

Complementing the roadmap is the Indonesia Corporate Governance Manual, a benchmark of existing laws and regulations within the context of globally recognized practices. The manual provides practical guidance to Indonesian companies – not just those that are traded on stock markets – on how to implement sound governance practices.

Now, as Indonesia’s corporates navigate choppy economic waters, is the right time for companies to improve their practices and prepare for the future. Indonesia’s companies — and the country as a whole — will be all the more stronger for it.

Sarvesh Suri is Indonesia Country Manager for IFC, a member of the World Bank Group and the largest global development institution focused exclusively on the private sector