Prepared By

Azman Muammar, Timothy Ross O’Connor, Pin Pin Liu.

There has been considerable interest in the corporate governance practices of modern corporations.  The notorious collapse of Enron in 2001, one of America’s leading companies, has focused international attention on company failures and the role that strong corporate governance needs to play to prevent them.  Countries around the world are instigating far-reaching programs for corporate governance reform, as evidenced by the proliferation of corporate governance codes of policy documents, voluntary and mandatory, both at the national and supra-national level (Solomon, 2007, p.25).  

Corporate governance sets out the processes by which companies are directed and administered.  It defines the particular rules and procedures through which corporate decisions and objectives are set and monitors whether outcomes are in agreement (Solomon, 2007, p.1).  Corporate governance is key in motivating the company towards the fulfillment of its collective goals without being offset by problems associated with conflicts of interest within the firm.           

Corporations are intended to effectively pursue the interests of their owners.  The greater the separation of ownership and control, the higher the possibility of increased agency costs.    Agency costs arise when those assigned to act on behalf of the shareholders, such as executives and senior managers, fail to do so effectively because of competing interests.  Systems of corporate governance are therefore intended to align these interests by governing the relationships between the concerned parties. Directors and management are responsible for initiating a model of corporate governance, which aligns the interests of corporate members, as well assessing this model’s effectiveness often.  When conflicts of interest occur, senior executives should behave honestly and ethically and must acknowledge the rights of shareholders (Solomon, 2007, p.17).  They may facilitate the exercising of these rights by communicating vital information in an understandable and assessable fashion.The Board of Directors should be required to have an array of expertise in order to manage a variety of business matters.  They should also be able to evaluate and oppose management’s performance.  The Board must be of an appropriate size and have a functioning mix of executive and non-executive members (Solomon, 2007, p.17).  Finally, the same person should not hold both the vital positions of Chairperson and CEO. Organizations should take steps to independently verify the reliability of the company’s financial reporting and should supply the shareholders with information concerning the responsibility and accountability of corporate members (Solomon, 18).

Traditionally, shareholders were primarily individual investors, such as wealthy businessmen, who had vested interests in the dealings of the companies they owned and hence exercised more control over them (Solomon, 2007, p.23).They hired and fired the President/CEO, elected the Board of Directors, which in turn hired and fired senior management, and kept a diligent eye on corporate affairs and the activities of key executives.           

Eventually, the separation of ownership and control became more pronounced.  Markets grew to be more institutionalized.  Now stock traders tend largely to be institutions such as mutual and pension funds, investor groups and banks (Solomon, 2007, p.23).  Consequently, investor’s interests are less frequently connected to the fortunes of individual corporations, and hence, investors tend to have less concern for any particular company’s corporate governance.When institutional investors disapprove of the President/CEO’s actions and believe their dismissal would be resource consuming, they often simply sell off their shares (Solomon, 2007, p.24).  As there is often little objection, the President/CEO in this case can bestow upon him/herself the Chairman of the Board position, which makes him/her especially difficult to get rid of. Such an environment has come with a simultaneous lapse in the oversight of large corporations.  The President/CEO now typically appoints his or her friends and business associates to the Board of Directors independent of shareholder concern (Solomon, 2007, p.24). 

Between 2000 and 2002, the U.S. saw a series of large-scale corporate accounting scandals, which dramatically shook investor confidence in securities markets.  When the share prices of the corresponding companies fell, investors lost billions.  The infamously fraudulent activities of Enron, Tyco, and WorldCom exposed major problems with conflict of interest and incentive compensation practices.  Specific factors contributing to these failures included boardroom failures, auditor conflicts of interest, banking practices, and executive compensation (Keasly, 2005, p.151).The aforementioned scandals in the U.S. spawned calls for increased oversight and regulation of corporate practices.  Responsibility to do so fell on the Securities and Exchanges Commission (SEC), a federal commission created to regulate the securities markets. Its statutes intend to promote full public exposure and to protect investors against fraudulent and manipulative practices in the securities markets (Keasly, 2005, p.152).On July 30, 2002, the Securities and Exchanges Commission enacted the Sarbanes-Oxley Act in an attempt to both restore investor confidence and combat corporate mischief (Keasly, 2005, p.152).The legislation established new or enhanced standards for all American public company boards, management and public accounting firms.  It requires the SEC to implement rulings on requirements to comply with the new law.  The act also established a new quasi-public agency, the Public Company Accounting Oversight Board (PCAOB) to oversee, regulate and discipline accounting firms in their roles as auditors of public companies.  The act further covers issues such as auditor independence, corporate governance, internal control assessment, and enhanced financial disclosure (Keasly, 2005, p.154).The Sarbanes-Oxley Act commands that there be a set of internal procedures intended to supply truthful disclosure.  An “internal control report” is required along with each annual Exchange Act and it must be confirmed that, “it is the responsibility of the management to “establish and maintain an adequate internal control structure and procedures for financial reporting” (Keasly, 2005, p.176). Above this, external auditors are obliged to provide a judgment on whether effective internal controls over financial reporting were upheld (Keasly, 2005, p.176). Additionally, it makes the CEO or CFO accountable for “certifying the integrity” of these reports as well as the corporate tax return.The Sarbanes-Oxley Act allows for harsher penalties for fraudulent or manipulative practices with regard to financial reports or external investigations while providing better protective measures for whistle-blowers (Keasly, 2005, p.176).  Overall, it requires companies avoid granting loans to management, maintain a greater independence from their external auditors, and to adopt more accountable, transparent, and accurate financial reporting methods as well as control procedures (Keasly, 2005, p.177). 

Corporate Governance of public Canadian companies are regulated by both corporate and security laws and is the responsibility of the corresponding provincial or territorial governments coordinated through the federal Canadian Securities Administrators (CSA) (McDermott, Farrel, 2005, p.53). As most of Canada’s largest companies are traded on the Toronto Stock Exchange (TSX), the Ontario Securities Commission is generally regarded as the lead securities authority (McDermott, Farrel, 2005, p.54).          

These authorities recommend the non-prescriptive approach to governance.  This is more akin to the system found in the U.K, other wise known as the “comply or explain” code of corporate governance. Publicly listed companies in Canada must either comply to the codes set forth, or explain why they haven’t complied with them.  This approach is influenced by the small size of Canadian markets; the large number of small-cap public companies; relatively concentrated ownership; and privileged access to U.S. markets.  The Canada-U.S. Multi-jurisdictional Disclosure System allows Canadian companies to access American markets using Canadian disclosure documents without being subject to American domestic reporting regulations (McDermott, Farrel, 2005, p.56).

Securities regulators in Canada have responded to recent developments in the U.S.  Because of the desire to keep investor confidence, the CSA has introduced new rules and policies tightly following those found in the Sarbanes-Oxley Act.  The new regulations include: the oversight of external auditors, CEO certification with respect to the accuracy of public disclosure statements and internal control over financial reporting; authority and responsibility of audit committees, appointing, overseeing the work of, and compensating external auditors; adopting a charter setting out responsibilities and procedures of the Board of Directors; adopting a written code of ethical business conduct; having a majority of independent board members; reviewing public disclosure of financial information; and establishing procedures for dealing with complaints with respect to auditing, accounting, and whistle-blowing(McDermott, Farrel, 2005, p.61).  The Ontario government has additionally increased the maximum penalties for securities law offences while the federal government followed suit with amending the criminal code to impose penalties for insider trading and threatening whistle-blowers (McDermott, Farrel, 2005, p.69).The new CSA Rules bear a resemblance to the guiding principles contained in the Sarbanes-Oxley Act in the U.S. – the main point of difference being the non-prescriptive qualities inherent in the Canadian initiatives. 

Economic crisis that hit Indonesia since August, 1997 has taught hard lesson. Indonesia is one of the biggest country in the world which has a lot of job to be done in term of Corporate governance. Since earlier stage after economics’ crisis, government tried to convince again with high efforts to implement good corporate governance. Many efforts are being done to introduce corporate governance in Indonesia with many activities such as education and socialization of corporate governance concept to communities.     

Different with companies under the common law system which is only approved one board of Directors, Indonesia were using two-board system based on Indonesian company law. It is consist of :

1.      The board of Commissioner (Komisaris) that performs supervisory and advisory roles

2.      Boards of Directors (including management) that performs the executives roles.

Someone whose called as “director” in an Indonesian setting might be act as part of executive team, whereas in other jurisdictions they might be part of supervisory or advisory team or part of executive team.      

Also, in Indonesia, they have General meeting of shareholders (FCGI, 2006). This is the most powerful organ in company and has power to approve or disapprove any company regulation.     

Under article 43 of the Lompany Law, it is required to appoint a corporate secretary, and such secretary acts as an investor relations officer.  In addition, it is being proposed that corporate secretary shall also act as compliance officer and keeper of corporate documents such as register of shareholders and special register of the company. One of the members of the “Direksi” may be selected as corporate secretary. Another framework of regulatory after company law, could be found in the rules and regulations issued by Indonesian Capital Market supervisory agency or BAPEPAM. Capital market law were implemented to the public companies i.e company which the shares are held by at least 300 persons and having paid up capital of IDR 3 billion while company law applied to all limited liability companies established under Indonesian law.

As stated in article 95 of capital market law, the company shall disclose any information through its annual reports and financial statement to shareholders as well as its reporting to BAPEPAM, the relevant stock exchanges and the public in a timely, accurate, understandable and objective manner. Companies also should disclose material importance to decision making of institutional investors, shareholders, creditors and other stakeholders with respect to the company.  

Another regulatory that has been issued by BAPEPAM, including:

  1. regulation requiring public companies to have independent directors and independent commissioners.
  2. regulations that relate with methods of voting shares.
  3. comprehensive rules on responsibilities for board of directors and independent auditors with regard to financial reporting and penalties for non-compliance
  4. regulations on disclosure of related-party transactions[1]

In earlier, Indonesia has problem in existing standards of auditing and compliance, accountability to shareholders, standards of disclosure and transparency and board processes[2].  According to the survey , Indonesia were rank in one of the worst in perceived standards of disclosure and transparency among Asia-Australia region[3]Indonesia in the same class with India, china, etc, while the best performers in investor protection are Australia, Singapore and Hongkong.

Anyway, since Indonesia’s economy has been becoming integrate  to world economy for their loans and equity financing, export and import, the docilement of international standard of corporate governance had been obeyed by Indonesian government. One study showed that among others, family control is more common in countries with poor shareholder protection while the widely held company is more common in countries with good shareholder protection.[4] As the same condition with several Asia’s country in ownership structure of the company; family based shareholder is also hold important key in many dominant positions, including in Indonesia.

The result for instance, board of commissioner’s function didn’t work properly in safeguarding the interest of shareholder. Then, check and balances mechanism such as existing of the independent commissioner or committees in company to audit the company process have been lacking. Transparency and another standards which is should be implemented properly are difficult to run adequately as disclosure practices.In term of creditor protection, there are some problem were exist as a result of weak of control and inadequate framework for financial institution, family based shareholder, and inefficient of judiciary system in Indonesia.  Anyway, creditor’s positions and his role in corporate governance sometimes have been weak due to mismanagement as explain above. Family based shareholder make the market only occupied by conglomerates that came from same families.

At previous, there is only little protection for creditors and other stakeholder since in practice it was difficult to declare a company bankruptcy[5]. However, later there is an improvement progress when the old bankruptcy law was replaced with government regulation in 1998 that makes it more reasonable for the court of law to declare company bankruptcy.[6] 

In addition, the high control and concentration of ownership of companies makes the market mechanism can’t work properly for corporate control and product. It is part of family based shareholder result in negative view.In earlier stage, the capital markets in Indonesia were dominated by external finance i.e bank loans, etc. It is because of strict regulatory and ineffective legal procedures that makes role of corporate bonds and corporate financing are limited. Also, the foreign interest rates were more liberalized than domestic rates, make it more comfortable to be chosen.The concept of corporate governance in Indonesia is rarely new in Indonesia. But, the efforts of the government to show good performance in corporate governance increase positive and significantly. Initiatives to set up National Committee for Corporate Governance in Indonesia (NCCG) has been done since agreement between international monetary fund (IMF) and Indonesia government signed in January, 2000. It is part of commitment to applied internationally agreed standards of corporate governance.

NCCG’s main responsibility  are:

  1. Codifying corporate governance principles
  2. Initiating regulatory reform to support the implementation of the code
  3. Developing institutional framework to implement the code.

   An initiative to develop corporate governance practices in Indonesia also includes:

  1. developing national strategy for corporate governance reform, including setting up the national committee for corporate governance
  2. conducting educational events on corporate governance for the public
  3. conducting pilot project to implement corporate governance principles in the industries
  4. carrying out regulatory reform within the capital market
  5. instituting a fit and proper test for directors and commissioners
  6. technical assistance from the international community

 As we explain earlier, the concept is fairly new and need to socialize massively. Every company in Indonesia should implement this with highly enthusiasm to make more value for shareholders, financiers, employees and for company itself. Also, the government should encourage any activity that support for good corporate governance implementation, i.e hold conference, educational service and joint assistance from international community.

Corporate governance has become a major and highly contentious issue in all of the advanced economies in all the developing company.

It happened in Taiwan, too.  It is concerned with the institutions that influence how business corporations allocate resources and returns.  ReBar case problem as one of discover sampling that would be interesting to anyone who lived in Taiwan to know this.  It is an identical sample for all of the family business although there are still many of the successful cases happen in taiwanese society such as Wang’s Taiwan Plastic group.  They are the most successful case in family business in Taiwan.  There are always problem between government, relationship and under table business which means people normally use illegal method to get what they want in their business.  Of course, the business performance, business demand and managing change system are the keys for the business.  Corporate governance in Taiwan has progressed due to improvements in accounting, financial reporting and the courts’ handling of insider trading. According to previous survey by Pricewaterhouse Coopers; Hong Kong and Singapore are the best area in Asia in terms of corporate governance due to its efforts to protect shareholders’ rights.  Although Taiwan made some progress in corporate governance, there is still much room for local companies to improve, including in the protection of shareholders, the publication of employees’ dividends, the independence of governing authorities and the allocation of corporate bonds. Balancing control; liquidity and capital needs are indeed.  If the company become older and larger and included more people in ownership, it will become more critical to strategic planning.

Recently, in Taiwan, corporate governance develops the capital market and financial system. How are Taiwan government going to protect of those shareholders becomes the first important lesson to those business person who want to increase their profit for the company. However, people in Taiwan always deal with relationships in their business; they believed if they can have good relationship with government, government people won’t betray them to announce their “dirty” behavior. However, the term governance is used most frequently by politicians and business leaders (David Wheeler). Actually, who controls it and who check it, is a starting point the premise of corporation will be run most effectively if all stake holders have the appropriate level of empowerment and that executive will manage best provided that they recognize their accountability to all stakeholders.

Finally, Large corporate failures, financial scandals and economic crisis have focused attention on the importance of good corporate governance to many countries. Corporate governance were defined as a set of rules that can create good relationship between internal and external stakeholders in respect to their right and responsibilities in order to create value to stakeholders.

By applying good corporate governance, there are some benefits that could be gained such as more easier to raise capital, lower cost of capital, improved business and economic performance, and also make good impact on share price. The bigger challenge is to ensure they are effectively implemented. Efforts should be directed not only as developing rules and regulation, but also promoting as practices guided by moral responsibility that will eventually paid off by the market.


Mary A. O’sullivan, 2000, Contests For Corporate Control, Oxford University Press, Oxford Armson, Emma and Sandra Patch, 2000. Current Government Initiatives in Corporate Governance.

A paper presented in ASIC corporate Governance Training Program, Sydney, Australia. Baird,Mark, (April 29,2000). Transparency and corporate governance in Republic Indonesia. The Jakarta Post, p4 

David Wheeler, Maria Sillanpaa, (1997) The Stakeholder corporation a blueprint ofr maxinmizing stakeholder value, Pitman Publishing, London, England 

Forum for Corporate Governance in Indonesia (FCGI), (2000). First Position Paper of the Forum for Corporate Governance in Indonesia. 

Government Regulation That Subtitutes A Law No.1 of 1998 on Changes to the Bankruptcy Law 

John L. Colley, Jr., Jacqueline L doyle, and Robert D. Hardie, (2002) Corporate Strategy, McGraw-Hill, New York 

Keasley, K., Thompson, S., Wright, M. (2005) Corporate Governance: Accountability, Enterprise and International Perspectives. John Wiley & Sons, Ltd. Chichester, U.K. 

Kurniawan M Dudi, Indriantoro Nur. 2000. Corporate Governance in Indonesia. The second Asian Roundtable on Corporate Governance.

La Porta, Lopez-de  Silvanez, Sheilefer and Vishny, 2000. Law and Finance. Journal Of Political Economy, as quoted by Ramsay and Stapledown. Corporate Governance: an Overview of the key issues and Debates.

ASIC Corporate Governance Training Program. Sydney, Australia. Law No.1 Of 1995, Indonesian Company Law  

McDermott, R., Farrel, S., (2004)  Corporate Governance in Canada.  McMillan Binch LLP, Toronto, Canada. 

Pricewaterhouse Coopers in Collaboration with Singapore Exchange. 1999 Survey of Institutional Investors. 

Solomon, J. (2007) Corporate Governance and Accountability 2nd Ed.John Wiley & Sons, Ltd. Chichester, U.K. 

Staatsblad No.217 of 1905 juncto Staatsblad no.348 of 1906 

Walace, P., Zinkin, J., (2005) Corporate Governance: Mastering Business in Asia. John Wiley & Sons (Asia) Pte Ltd. Singapore, Singapore.

[1] Outlined in the letter of intent as a commitment to the International Monetary Fund, January 2000

[2] Pricewaterhouse coopers (in collaboration with the Singapore Exchange), 1999 Survey of Institusional Investors

[3] determined by a range of factors:disclosure of information in a timely manner, avoidance of selective disclosure during meeting with major investors, broad market disclosure to transnational investors, disclosure levels are above home country requirements, etc.

[4] La Porta, Lopez-de Silvanez, Shleifer and Vishny, “Law and Finance” (1998) Journal of Politial Economy, as quoted by Ramsay and Stapledon “Corporate Governance: An overview of the key issues and Debates”, Sydney, 2000.

[5] Staatblad No.217 of 1905 juncto Staatblad no. 348 of 1906

[6] Government regulation that substitutes a Law no. 1 of 1998 on changes to Bankruptcy Law