Corporate governance in Indonesian state-owned enterprises: Feeding with western ingredients

Abstract

Corporate frauds and failures in Indonesian have continued despite the corporate governance principles of Indonesia’s State-Owned Enterprises (SOEs) which have been strengthened following the Asian financial crisis of 1997/1998. This appears to indicate that corporate governance principles primarily adopted from developed Western nations are not adequate to address problems faced by SOEs in Indonesia. This primarily analytical paper evaluates the current corporate governance practices in Indonesian SOEs in light of the prevailing political and corporate culture. Given the complexity of Indonesia’s political and corporate culture the adoption of corporate governance principles from Western nations as promulgated by the OECD and/or the Cadbury report are inadequate to reduce corporate mismanagement and failure among SOEs. The study also utilizes some qualitative interview data from thirty respondents at managerial level within three SOEs to aid the assessment of corporate governance practices and principles in the Indonesian context

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“…Theoretically, this study does not support agency theory which states that governance mechanisms that are implemented efficiently and effectively will tend to avoid agency conflicts, especially information asymmetry by supporting the application of accounting conservatism (Leventis et al, 2013). As explained before corporate governance in Indonesia tends to be weak (Utama et al, 2017) and in particular the governance structure in Indonesian stateowned companies is considered not functioning optimally, especially the role of the board independence and independent audit committee due to indications of malpractice of abuse of authority (Worang & Holloway, 2006) and governance cannot function optimally in a country with low governance mechanisms such as in Indonesia (Francis et al, 2013;Puspitaningrum & Atmini, 2012). However, when viewed from the level of application of accounting conservatism, the results show that the state-owned companies in this study apply at a low level and even tend to be less conservative.…”

“…Empirically, these results do not support that state-owned companies have an advantage in directing management to make effective decisions (Alkurdi et al, 2017) so that it will improve the quality of earnings (Xia & Zhu, 2009), and theoretically these results do not support agency theory which shows that governance mechanisms are able to prevent agency problems such as earnings management. This result is probably because Indonesian stateowned companies have indications of malpractice of abuse of authority and power by the government through its representatives in the company (Worang & Holloway, 2006) and the governance mechanism in Indonesian state-owned companies is considered not optimally, especially the role of the board independence and independent audit committee because the two governance structures are considered unable to run optimally in countries with low governance mechanisms such as in Indonesia (Francis et al, 2013;Puspitaningrum & Atmini, 2012). The performance of governance in state-owned companies that is not optimal means that management feels that it is not being monitored optimally by the company's board so that managers feel they have the opportunity to practice earnings management.…”