Sidharta Utama FEUI

SIDHARTA UTAMAFEUI

Public dan Corporate Governance serta Pengaruhnya terhadap Kinerja Perusahaan

Simposium Nasional AkuntansiManado, 26 September 2013

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Objectives

To provide evidences of public and corporate governance practices in Indonesia,

To explain the effect of public governance on corporate governance

To explain the effect of public and corporate governance on firm performance

To suggest future research on the relation between governance and financial reporting quality in Indonesia

ACGA – CLSA CG COUNTRY AND COMPANY ASSESSMENT

ASEAN CG SCORECARD CG ASSESSEMENT ON PLCS

WORLDWIDE GOVERNANCE INDICATORS

Evidences on CG and PG Practices

IICD

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Corporate Governance: Aligning Corporate, Shareowner, Public Interests

“An effective system of corporate governance must strive to

channel the self-interest of managers, directors and the advisors upon whom they rely into alignment with the corporate, shareholder and public interest.”

Ira MillsteinSenior Partner, Weil Gotshal & Menges, LLPSenior Associate Dean, Corporate Governance, Yale School of ManagementChair Emeritus, the Forum’s Private Sector

Advisory Group4

IICD

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OECD Corporate Governance Principles

Ensuring the basis for an effective corporate governance framework

Protecting Rights of Shareoweners

Equitable Treatment of Shareholders

Respecting Rights of Stakeholders

Disclosure and Transparency

Responsibilities of the board

IICD

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CLSA - ACGA CG Watch 2012

CLSA – ACGA conduct an CG assessment at country and company level every two years.

Environmental and social issues are also addressed.

Twelve countries (including Indonesia) are surveyed.

The assessment primarily is based on questionnaires sent to to institutional investors in the Asia region.

Results are widely publicized and cited.

IICD

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CG Watch market scores: 2007 to 2012

(%) 2007 2010 2012 Trend of CG reform1. Singapore 65 67 69 Improving, but culture needs to open more

2. Hong Kong 67 65 66 Static, but reinvigorated regulator positive

3. Thailand 47 55 58 Improving, but corruption a major issue

4. = Japan 52 57 55 Government stalling, companies opening

4. = Malaysia 49 52 55 Culture at last showing signs of openness

6. Taiwan 54 55 53 Rules improving, but still behind the curve

7. India 56 48 51 Enforcement up, Delhi an obstacle

8. Korea 49 45 49 Government more open, chaebols closed

9. China 45 49 45 Rules improve, but culture still weak

10. Philippines 41 37 41 Improving, but will it be sustained?

11. Indonesia 37 40 37 Regressing, but new regulator may helpSource: Asian Corporate Governance Association

IICD

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CG Watch: Market Category Scores 2012

Market category scores

(%) Total CG Rules & Enforce- Political & IGAAP CGPractices ment Regulatory Culture

1. Singapore 69 68 64 73 87 54

2. Hong Kong 66 62 68 71 75 53

3. Thailand 58 62 44 54 80 50

4. = Japan 55 45 57 52 70 53

4. = Malaysia

55 52 39 63 80 38

6. Taiwan 53 50 35 56 77 46

7. India 51 49 42 56 63 43

8. Korea 49 43 39 56 75 34

9. China 45 43 33 46 70 30

10. Philippines

41 35 25 44 73 29

11. Indonesia 37 35 22 33 62 33

Source: Asian Corporate Governance Association

I I C D, Please do not distribute without IICD's permission

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ASEAN Capital Market Forum: Raising CG Practices with

ASEAN CG Scorecard

ASEAN CG Scorecard

Enhancing CG Rules/Standards

Improving Compliance with Rules/Standards

Encouraging Voluntary

Adoption of CG Practices


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ASEAN CG Scorecard

Globally Based

• OECD CG Principles

• Other International and Regional Standards

Regionally Developed

• Six participating countries

• Move beyond local rules/standards

Public Information

• English• Easily

Accessible


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CG Scorecard: Results for Indonesia

0

40

80

120

MaximumAverageMinimum

Mengapa perlu Good Public Governance (GPG)?

Mengurangi masalah keagenan di sektor publik dengan meningkatkan transparansi serta pengawasan yang efektif pada: Eksekutif Legislatif Yudikatif Badan Pengawas dan Pemeriksa

Memastikan tercapainya tujuan pemerintah: Memajukan kesejahteraan umum, keadilan sosial,

mencerdaskan kehidupan bangsa, menjamin keamanan

GPG Principles (WGI)

Voice and Accountability: The extent to which a country's citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association, and a free media.

Political Stability and Absence of Violence: The likelihood that the government will be destabilized or overthrown by unconstitutional or violent means, including politically-motivated violence and terrorism.

Government Effectiveness: The quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government's commitment to such policies.

GPG Principles (Worldwide Governance Indicators)

Regulatory Quality: The ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development.

Rule of Law: The extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence.

Control of Corruption: The extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as "capture" of the state by elites and private interests.

Worldwide Governance Indicators, 2012

The Worldwide Governance Indicators (WGI): A research dataset summarizing the views on the quality of

governance provided by a large number of enterprise, citizen and expert survey respondents in industrial and developing countries.

Data are gathered from a number of survey institutes, think tanks, non-governmental organizations, international organizations, and private sector firms.

The WGI do not reflect the official views of the World Bank, its Executive Directors, or the countries they represent. The WGI are not used by the World Bank Group to allocate resources.

Overall: Average Rank of Governance Indicators

Hong K

ong

Singa

pore

Japan

Taiw

an

Korea

, Sou

th

Mala

ysia

Thail

and

India

Indon

esia

Philip

pines

Vietna

mChin

a0

20

40

60

80

100

Rank (%)

Rank (%)

Indonesia: Rank (%) of Governance Indicators over time

Year 1998 Year 2005 Year 20110.05.0

10.015.020.025.030.035.040.045.050.0

Voice and Ac-countabilityPolitical stability and Absence of violenceGovernment Ef -fectivenessRegulatory QualityRule of LawControl of Cor-ruptionAverage

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Public Governance, Corporate Governance and Firm

Performance

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Public Governance

Corporate Governance

Firm performance

PUBLIC GOVERNANCE AND CORPORATE GOVERNANCE ON FIRM PERFORMANCE

IICD 20

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Government Quality and Corporate Governance

(Fan et al.2011)

“...the extent to which government officials' and politicians' decisions benefit the citizen they serve, and whether the decisions are made and executed in a legally and socially acceptable manner.” (p. 209)

Low quality government results in firms (in Fan et al. 2011): conducting bribery and political connection building

(Charumilind et al., 2006; Claessens et al., 2008; Fan et al., 2008).

having complex organizational structures, poor transparency and weak corporate governance (e.g., Leuz and Oberholzer-Gee, 2006; Fan et al., 2009; Jiang et al., 2010).

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Why do countries matter so much for corporate governance? (Doidge et al. 2004)

Country characteristics (investor protection, economic and financial development, institutional infrastructure) are more important than company characteristics in determining the level of corporate governance.

Investor protection at country level is an important determinant of corporate governance.

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Legal System and CG (Klapper and Love, 2004)

Legal system (Efficiency of the Judiciary, Rule of Law, Corruption, Risk of Expropriation, and Risk of Contract Repudiation) has a positive relation with firm-level CG.

CG has a positive relation with firm value and performance and the relation is stronger in countries with weak shareholder protection and poor judicial efficiency.

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Moderating Effect of PG on the Impact of CG on Loan Contracting

Ge et al. (2012): “favorable effect of firm-level governance on some loan contracting terms is stronger in countries with strong legal institutions....”

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Research Opportunities in the Relation between Governance

and Accounting

CG as a Determinant of Earnings Management: Evidences in Indonesia*

Voluntary Disclosure CG Index (n.s) % of Independent Commissioner (n.s) Related Party Transactions (mixed) Managerial Ownership (mixed) Institutional Ownership (mixed) Existence of Audit Committee (n.s) Number of board members (n.s)

*Based on articles published during 2009-2011 in 6 journals: Jurnal akuntansi dan Auditing Indonesia, Jurnal Bisnis dan Akuntansi, Jurnal Ekonomi dan Bisnis, Jurnal Akuntansi dan Manejemen, Jurnal Akuntansi dan Keuangan, Jurnal Akuntansi dan Keuangan Indonesia

CG as a Determinants of Earnings Quality: Evidences in Indonesia*

Size of BOC (+)Independence of BOC (+)Number of members of audit committee (n.s)% of independent members in audit committee (n.s)Existence of audit committee (mixed)Managerial ownership (n.s.)Institutional ownership (n.s)Composition of BOC (n.s.)Audit Quality (size and specialization) (n.s)*Based on articles published during 2009-2011 in 6 journals: Jurnal akuntansi dan Auditing Indonesia, Jurnal Bisnis dan Akuntansi, Jurnal Ekonomi dan Bisnis, Jurnal Akuntansi dan Manejemen, Jurnal Akuntansi dan Keuangan, Jurnal Akuntansi dan Keuangan Indonesia

Why most governance variables are not significant?

Suitability of governance mechanism in Indonesia

Ownership structure and group affiliation are not adequately be considered

Drawbacks in research design


US & UK: Dispersed ownership structure: management expropriates wealth of shareholders (Type 1 Agency Costs) Shareholders appoint members of BOD Board of Directors: Majority should be independent

(from key executives) Members of Audit Committee appointed by BOD Managerial ownership: Employed to align

management’s interest with shareholders’ interest. Insitutional ownership: Have the capacity and

incentive to monitor management.


Indonesia: Concentrated ownership with control right of controlling

shareholders exceeding their cash-flow right. More concentrated ownership reduces type 1 agency

costs Controlling shareholders effectively determine members

of BOC (including independent commissioner) and BOD. Management is under control of controlling

shareholders (Type I agency costs not an issue) Group affiliations are common.


However, it increases the likelihood of controlling shareholders expropriate the wealth of non-controlling shareholders (Type 2 agency costs)

Can BOC be effective in overseeing BOD to prevent type 2 agency costs?


Managerial ownership: The measure may actually represent ownership of

controlling shareholders Maybe useful to reduce agency costs if managers

are all professionals (i.e. Not related to controlling shareholders)

Institutional ownership: Its role under concentrated ownership is different

from its role under dispersed ownership

Areas to Research: Corporate Governance and Financial Reporting Quality

Impact of corporate governance variables on financial reporting quality: Divergence of Control Rights and Cash Flow Rights Representation of controlling owners and government officials in

BOC and BOD Family controlled firms; Group affiliation Related party transactions: efficient vs abusive Qualification of BOC: Financial literacy, Independency, Diversity,

Competency Competency, Independency, Duties and authorities of Internal

Audit Qualification of Audit Committee (input, process)

Moderating effect of PG variables on the impact of CG on financial reporting quality

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Public Governance

Corporate Governance

Quality of Financial Report

FUTURE RESEARCH: MODERATING EFFECT OF PUBLIC GOVERNANCE ON THE RELATION BETWEEN CG AND FINANCIAL REPORTING QUALITY

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References

ACMF-ADB, ASEAN Corporate Governance Scorecard: Country Report and Assessments 2012-2013,

ACMF, ASEAN Corporate Governance Scorecard - template, www.theacmf.org/ACMF/upload/asean_cg_scorecard.pdf

CLSA, 2012, CG Watch 2012: Corporate Governance in Asia, http://www.acga-asia.org/loadfile.cfm?SITE_FILE_ID=658

Doidge, C., G. A. Karolyi, and R. M. Stulz, 2007, Why do countries matter so much for corporate governance?, Journal of Financial Economics 86, 1-39.

Fan, J.P.H, K.C.J. Wei, and X. Xinzhong, 2011, Corporate finance and governance in emerging markets: A selective review and an agenda for future research, Journal of Corporate Finance 17, 207-214.

Ge , W., J. B. Kim, B.Y. Song, 2012, Internal governance, legal institutions and bank loan contracting around the world, Journal of Corporate Finance 18, 413-432.

Klapper, L.F. And I. Love, 2004, Corporate governance, investor protection, and performance in emerging markets, Journal of Corporate Finance 10, 703-728.

Worldwide Governance Indicators, http://info.worldbank.org/governance/wgi/index.aspx#home

http://info.worldbank.org/governance/wgi/index.aspx#home

TERIMA KASIH

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Sidharta Utama FEUI