Remarks by Mark Baird
April 25, 2000

Quotes from James Wolfensohn, President of the World Bank

(from the Economist Newspaper’s "The World in 1999")

"The proper governance of companies will become as crucial to the world economy as the proper governing of countries"

"The World Bank has become acutely aware that strong corporate governance produces good social progress. The two go together….just as with Governments firms must be run transparently, management must be accountable".

Introduction

Although the need for good corporate governance has been acknowledged since corporations were first created, an awareness of this need has grown rapidly around the world in recent years. Initiatives for improvement started to accelerate in the US in the early 1990s. Since then the OECD has published principles for good corporate governance and the World Bank has worked in partnership with the OECD in disseminating these principles.

Poor corporate governance is widely regarded as one of the main factors that first brought on the crisis in Indonesia and then contributed to its severity and length. Investor confidence was undermined during the crisis and remains weak, not just in certain companies but in the entire Indonesian market. The domestic and international financial markets are still reacting negatively, especially to the lack of transparency in the Indonesian banking and corporate sectors.

This lack of transparency is no longer acceptable in the world of today - - a world in which the leap in information technology has made it possible, via e-mail and the internet, to gain access to information more quickly, and from more diverse sources, than ever before. The crisis has shown us that it is no longer possible for companies, institutions or countries to do whatever they like in isolation without attracting penalties - - no company, institution or country can afford to risk the dispassionate logic of the marketplace by pursuing policies or strategies that lead to, say, the wholesale withdrawal of investor capital, as we saw here during the crisis, or in the multinational corporations that have had to respond to pressures for change by consumers and investors alike.

Investment decisions are based on information, and the quicker and more reliable the information, the less likely it is that decisions will be made on emotion and herd instinct. It is possible for the Dow to raise and fall by 500 points without setting off global panic. This is in part due to the trust that investors on Wall Street have that the information underpinning their decisions is accurate and transparent, and that they get it at the same time as everyone else. This was not true of the Asian crisis, when the devaluation of the Thai bath set off investor reactions of panic and flight in response to growing knowledge about the deep cracks in the financial sectors. And it certainly was not true in Indonesia, where you had a situation in which, the more investors - - foreign and domestic - - learned about the problems within the economy, the bigger the crisis in confidence grew.

Although there have recently been signs of an incipient economic recovery in Indonesia this should not be grounds for complacency. Unless the governance problems affecting Indonesia’s corporate and banking sectors are resolved, the recovery will be limited and Indonesia’s population, especially the poor, will remain highly vulnerable to future crises.

There are some real opportunities, however, that we can look to in helping shape recovery, and in improving corporate governance - - one of these is the role that the Media has already played and can increasingly play in fostering greater transparency, and holding both government and the business sector accountable to the public.

The press have played a critical role in the reform process of the past years, and the tremendous political transformation Indonesia has undergone. This is a country that has achieved the triumph of securing a democratically - -elected President, of empowering a free press, and of beginning a campaign against a system of corruption that is as bad as any in the world today. You have to ask, what could have been achieved in this new environment had the media not been free to report on the government, on politics, on corruption, collusion and nepotism? The media here have been a catalyst for change; they have challenged successive governments - - and institutions such as Parliament, the World Bank, and IMF, as well as the private sector - - to be increasingly open and accountable for their actions. Through their words and their actions, the press have done a lot to promote transparency in government, business, and civil society; have broadened the debate on public policy, and have played a key role in exposing, and perhaps more critically, following-up on allegations of corruption, such as you saw with Bank Bali and the social safety net programs.

The press must continue to play this unique role - - both in building awareness and knowledge of public and private sector practices - - and in building expertise, experience, and professionalism among their colleagues to establish over the long-term a well-educated press corps able to hold public and private sector institutions - - as well as itself - - accountable to standards of transparency and responsibility.

The new openness and transparency in Indonesia has also opened the door to rapid improvements in corporate governance and the challenge now is to seize the opportunity, to achieve important gains and lock them in. With the recent launch in Indonesia of the Partnership for Governance Reform the stage is now set for a concerted effort to support corporate governance reform in Indonesia.

The Problems

The underlying condition of the Indonesian corporate and financial sectors at the onset of the crisis is well-known: banks were exposed to excessive levels of unhedged foreign debt; credit allocation by banks to companies showed little regard for future debt servicing; companies were highly leveraged, with substantial unhedged short-term foreign debt; and profitability was low. External discipline through competition was muted by entry barriers and legal monopolies, and the threat of hostile takeovers of under-performing companies was minimal in the face of strongly entrenched insiders.

Poor corporate governance was a major contributor to this state of affairs and in Indonesia has had the following characteristics:

• Corporate governance has been seen primarily as a compliance issue rather than a means of enhancing corporate performance.
  
  
• In common with many other parts of Asia, Indonesian corporates are predominantly family-owned, even when publicly listed.
  
  
• Fraud and insider transactions have been common, disclosure has been weak and the disclosure and disciplinary mechanisms of the capital market have been ineffective.
  
  
• Minority shareholders and other stakeholders have had few means of protecting themselves against majority shareholder abuses. Although mechanisms for addressing abuses do exist in Indonesian Law they are little used and the weak judiciary has limited their effectiveness.
  
  
• Managers and directors have been largely immune from stakeholder accountability.
  
  
• Banks have been ineffective monitors of corporate managers.
  
  
• A weak bankruptcy and judicial system has left creditors with little leverage over their debtors.
  
  
• State enterprises have been subject to significant intervention by government in business decisions, and SOE performance monitoring has been almost non-existent.
  
  
• The role of the regulators BAPEPAM and JSX has not been strong enough to compensate for the weak judiciary.

Measures Taken to Date

There have been recent positive steps to begin dealing with these weaknesses:

• A number of private business organizations and NGOs such as the Indonesia Netherlands Association and Transparency International have begun initiatives to support improved transparency and corporate governance.
  
  
• A broadly based National Committee on Corporate Governance (NCCG) was created in late 1999. This committee comprises some 20 members from the public and private sectors representing the legal and accounting professions, the banks, state owned enterprises, private corporates, the Stock Exchange and important Government agencies such as BAPEPAM and the Ministry of Law and Legal Affairs.

The NCCG has produced a draft of a Code of Good Corporate Governance that addresses issues such as shareholders rights and responsibilities, the functions and composition of the Boards of Commissioners and the Boards of Directors, internal and external audit, the role of the corporate secretary, stakeholder rights and stakeholder participation and monitoring of management decisions, timely detailed and accurate disclosure of management and financial information, confidentiality of information that can affect share prices if it is leaked before it is officially made public, and restrictions on the use of inside information for personal gain.

The Reform Agenda

Corporate Governance reform in Indonesia is still in its infancy and much remains to be done. It will be years before the necessary reforms are fully effective but here are some quick wins to be made and a need now for immediate action to get the ball rolling so that it can gain momentum.

Firstly urgent measures are needed to improve the business environment in general, not only for large corporates but also for small and medium enterprises that have the potential to be a major productive force in the economy as well as major sources of employment and income. These measures include:

• Promote better competition and create the new competition agency provided for in the 1999 Law on Competition.
  
  
• Start taking steps to reduce the burden of excessive government regulation, with its associated burden of corruption, on the business sector.
  
  
• Strengthen the rule of law and the judicial system, in particular the commercial court as it affects the insolvency and bankruptcy mechanisms, property rights and contract enforcement.
  
  
• Accelerate banking and corporate restructuring, especially by means of debt equity conversions. An important effect of this will be to dilute the concentration of corporate ownership and bring fresh management into the banking and corporate sectors.

Some specific measures needed to improve corporate governance include:

• Improve the requirements and the frequency of disclosure and publication of financial information to bring them into line with best international practice, especially from listed companies, banks and other companies raising money from the public.
  
  
• Improve disclosure of related party transactions and improve rules and enforcement against the use of inside information.
  
  
• Improve standards of accounting and audit in line with international norms and provide more training for accountants and auditors.
  
  
• Strengthen rules governing the responsibilities and accountabilities of Supervisory Boards, Boards of Directors and internal and external auditors.
  
  
• Improve the quality of Supervisory Boards and Boards of directors by increasing the required minimum number of outsiders on these Boards, set criteria for the selection of Komisars and Directors, and provide them with training as needed.
  
  
• Strengthen all aspects of BAPEPAM but especially its capacity to monitor and enforce compliance with rules on public disclosure.
  
  
• Fully implement the company registry, train its administrators, publicize its availability and provide training in its use.
  
  
• Strengthen minority shareholder rights by improving rules on listing and securities transfer.

Next Steps

Explore the potential for the use of the public/private National Committee on Corporate Governance as a forum for all major stakeholders to discuss and plan corporate governance reforms.

A first step by the NCCG should be to work to develop a real consensus among its members around its recently drafted Code on Good Corporate Governance.

Government should move rapidly to implement the measures within its own control, such as improving existing regulations, implementing new regulations, and strengthening public institutions such as BAPEPAM, responsible for encouraging and enforcing good corporate governance.

Private initiatives and self regulation should also be encouraged. A good example is the recently announced corporate governance agreement between the Indonesia Netherlands Association and a number of Indonesian professional associations and self-regulatory organizations. KADIN has also announced a campaign to promote improved corporate governance among its members.

There is a need for broad programs using the media as well as public meetings, conferences and seminars to develop public awareness of the need for transparency and improvement in the governance structures and mechanisms of the banking and corporate sectors. The message is that better corporate governance and transparency can bring benefits to all - - the general population, customers, suppliers, employees, investors, shareholders and management alike.

Shareholder activism should be encouraged as a means of enforcing good governance on public corporations. Such activism has been a major driving force for change in the United States and elsewhere.

NGOs and other "watchdogs" should be encouraged to act as pressure groups for reform.

Support Available from the International Community

Helping Indonesia improve transparency and good corporate governance are top priorities for the International Financial Institutions and the donor community. Improved corporate governance is a part of the reform program agreed by the Government with the IMF and spelled out in the Letter of Intent. Within the recently created Governance Partnership, the Asian Development Bank is taking the lead on promoting good corporate governance but substantial help will also be provided by the World Bank and the bilateral donors. This help will take the form of partnerships with the private sector, specialist technical advice for the NCCG, BAPEPAM and other key agencies, and financing of training, seminars and conferences to disseminate international best practices.

Indonesia is coming to grips with the benefits of openness, of the need for serious legal reforms and for ensuring respect for human rights, of instilling sound corporate governance and other positive changes. The lack of these basic ingredients of an open democracy in the past has caused Indonesia great pain and great cost. President Wahid has shown himself to be a reformer - - and if we have learnt anything from the lessons of development, it is that countries that commit themselves to reform, to opening up, to transparency, to freedom of expression, are the ones that are going to succeed and prosper. Corporate governance reform will become one of the most important items on Indonesia’s medium term economic reform agenda. Its successful implementation will be one of the prerequisites for sustained economic growth, which in turn is the key to reducing poverty and the vulnerability of the poor. Good corporate governance will also be an important element in ensuring a more transparent, fair and just society. You can be assured that the international community will give all the support that it can to Indonesia’s efforts in these areas.