School of Government and Public Policy-Indonesia

Indofood, for instance, especially since its restructuring following the 1998 Asian crisis, has been characterized by good corporate governance over the last decade and a half. There seems to be a willingness by the Salim family to endorse a legal culture to adhere to what has been legally agreed upon and embrace values that signal trustworthy behavior. Those familiar with Indonesian history know how the Salim family was able to gain competitive advantage in Indonesia, not the least through cleverly benefiting from a special relationship with those in power, in a context of rather weak institutions, prior to the start of Indonesia's democratization process two decades ago. Nonetheless, the perception of having implemented good corporate governance has helped them to gain a good reputation among foreign investors. The late patriarch's lofty objective to "feed the nation" obviously did not harm this perception, either. The institutional context of weak legal enforcement and concentrated ownership in Indonesia often results in potential conflicts of interest between majority owners and minority shareholders on the one hand, and in unethical if not corrupt behavior and violations of individual property rights on the other. Talking with numerous owners of listed companies, entrepreneurs and foreign investors during the last three decades seems to reconfirm the gut feeling that all parties seek to protect themselves from weak legal institutions where potential conflicts of interest between majority and minority shareholders often occur, and where corruption and property rights violations at all levels of society are still rife. How to address those "voids" of illegitimate rent-seeking behavior? Should one apply some universal "context-free" governance principles as recommended by international institutions or international law firms? Although legal interpretations may seek to implement some "universal" governance standards or generic road maps, it seems that no "one best corporate governance way" really exists, as in minimally complying with certain standards guarantees full transparency, disclosure, equal shareholders' rights or full accountability. Indeed, there is no single global governance standard or codex that could be literally applied to any situation. The effectiveness of corporate governance practices varies due to the institutional and cultural idiosyncrasies of different nations. The legal environment, the ownership structures, systems of governance and the functioning of the board of directors are often intertwined in Indonesia. For instance, Indonesia presents a unique cultural setting in a dynamic economy with the potential to advance the well-being of approximately 260 million people. Yet, we do not have a theoretical framework that explicitly addresses why corporate governance practices differ across countries or over time, and we consequently lack in-depth knowledge concerning the transferability of (global) corporate governance practices assumed to add value. When a country is characterized by low overall governance quality - as in high opacity or a lack of transparency, and high levels of perceived corruption - it deters some investors from entering, while high governance quality incentivizes foreign firms to operate or invest in the host country. Due to this potential deterrence, a specific company in Indonesia, with its relatively poor country-level governance (compared to its neighbors or international standards), may decide to enhance and adopt its firm-level corporate governance to strengthen its competitive attractiveness to lure foreign investors. The reasoning is that applying specific governance mechanisms may improve the firm's performance in the process. Specifically, minority investors could be convinced if conflicts of interest could be reduced or potential devastative corrupt behavior significantly diminished. We therefore try to understand which dimensions of comparative corporate governance are most critical to affect the operating performance, while taking sociocultural sensitivities and weak legal institutions into account, and therefore potentially attract investment. The corporate governance deviance in Indonesia and most other Asian countries with a civic law tradition, with the exception of the common law jurisdictions in Singapore and Hong Kong, and to a lesser extent Malaysia, is socioculturally rooted in a dominant national relationship-based governance instead of a rules-based governance system. Moreover, the motivation to potentially expropriate assets from a listed firm is lower in common law countries where there exists a higher investor protection. Since no reliable universal rules can be taken at face value, foreign investors are advised to distill some generic basic "rules of thumb" when setting up operations in Indonesia. Here are some suggested heuristics, or rules of thumb: foreign investors who have decided to line up with local Indonesian partners need to clearly state all the responsibilities of the different (majority and minority) partners in the venture. In addition, they carefully need to choose a reputable and trustworthy partner with similar objectives and goals. Finally, the foreign entity needs to emphasize an effective pro rata financial investment in the firm's ownership structure in the case of a joint venture. Moreover, foreign investors may need to adopt a beyond "comply and explain" heuristic to incite long-term effectiveness of board practices and adapt to the local sociocultural context without jeopardizing international standards. For instance, when applying the two main functions of the supervisory board - such as a monitoring or control function and an advisory role - its importance may be influenced by institutions, sociocultural characteristics and other elements of the corporate governance bundle, such as the reputation of family shareholders attempting to neutralize the weak legal institutional protections of all shareholders. Furthermore, when foreign investors decide to buy stock on the Indonesia Stock Exchange, our research - by Peter Verhezen and Geoff Martin, 2018, Melbourne Business School, and initiated by discussions with the International Finance Corporation in Jakarta; and a recent book and subsequent Strategic Review essay by Verhezen, Williamson and Soebagjo - took into consideration the specific Indonesian institutional setting of concentrated ownership of family businesses or state-owned enterprises, on the one hand, and institutional voids on the other, when analyzing which governance variables were affecting financial performance. The main concern is that this combination of weak governance at the country level and conflictual owners at the firm level occasionally results in rent-seeking or corrupt behavior. However, our empirical research did not find the typical assumed agency problems, indicating that other linkages and interdependencies of corporate governance practices are playing a more crucial role in an emerging institutional Indonesian market context. The focus turns to the interactions between insider-outsider conflicts and accountability conflicts in an emerging market context. Obviously, foreign but also domestic (minority) institutional investors are willing to pay a premium for good governance, and they search for firms that have good governance practices and promote the adoption of voluntary codes of good governance, as in a self-regulatory "comply or explain approach. Just after the 1998 crisis, investors were willing to pay up to a 28 percent premium for firms that were perceived to be well governed. Indeed, quite a number of studies confirm investors will pay a premium for well-governed companies as they tend to perform better. Today, these premium rates are rather marginal since the perceived volatility or risk has been dramatically decreased in almost all companies since 2001. The pressure for foreign capital and product markets may not necessarily lead to convergence to international governance standards. Board independence, for instance, is not systematically linked to outright positive performance, and concentrated ownership monitoring its top management functioned as a substitute for independent directors who arguably did not have any significant impact on performance. Complying to have a minimal number of "independent" members on the board seems more a tick the box exercise than actually impacting financial performance. With a controlling shareholder in most listed companies in Indonesia, the fundamental governance problem is not necessarily opportunistic rent-seeking behavior by executives and directors at the expense of public shareholders at large, but rather potentially inappropriate or opportunistic behavior by the controlling family shareholders at the expense of minority shareholders, as indicated above. Where shareholder rights are not well protected, investors will compensate for this deficiency by taking controlling positions in the firm, or expect clear idiosyncratic governance practices to be put in place to guarantee some minimum level of proper oversight of top management, but especially over majority shareholders to neutralize for potential expropriation of company property - or tunneling, be it cash flow, assets or even equity as in insider trading practices - away from the listed company. We found some form of hybridization in a sense that "best governance practices" are adopted and customized according to their particular circumstances and institutions. The use of reputable auditors and inclusion of related party transactions in the shareholder agreement indicate such signaling effects. Indeed, our research indicates that the presence of reputable auditors ("Big Four" auditors) has a positive effect on financial performance, which is likely due to the perceived improved transparency and disclosure. Considering the weak legal enforcement and less than stellar protection of individual shareholder rights under Indonesian law, these listed firms on the Indonesia Stock Exchange signal their willingness to be more transparent, and thus reliable or trustworthy, by engaging a reputable third-party intermediary. Similarly, our findings reveal a positive effect on the return of assets with the implementation of strict rules to constrain or forbid related party transactions that could be interpreted as a proxy for potential expropriation, collusion or outright corrupt behavior. In other words, by having proper mechanisms and procedures in place that will limit the potential of corruption or expropriation or tunneling of cash flow or assets, the Indonesian firm indicates its willingness to limit unfair practices or curb possible corruption. In addition, a block-holding family or state-owned ownership was predicted to negatively affect the net income of the Indonesian listed firms, unless the company explicitly disclosed the beneficial ownership (or block-holding owners). Furthermore, we found a positive relationship between foreign institutional ownership and the firm's return on assets. This is likely due to the perception that these institutional owners would bring into or require some sound minimal governance practice from the firm. Responsible leadership beyond compliance