Board Compensation, Corporate Governance, and Firm Performance in Indonesia

Salim Darmadi  

Indonesia Financial Services Authority (OJK)

August 9, 2011

Abstract:      

This paper examines the determinants of board compensation in a developing economy that adopts a two-tier board structure system. Corporate governance structure, firm-specific characteristics, and firm performance are hypothesized as significant determinants. The sample consists of 442 firm-year observations, comprising 255 listed firms on the Indonesia Stock Exchange (IDX) in the financial years 2006 and 2007. I provide empirical evidence that profitability, firm size, and the number of board members are positively associated with compensation level. Smaller firms are found to spend higher proportion of their financial resources to compensate their board members. Additionally, firm size and family control play important roles in explaining the relationship between board compensation and firm performance. Further, this study investigates pay-performance sensitivity and reveals that changes in firm value are positively associated with changes in board compensation.

Number of Pages in PDF File: 45

Keywords: board compensation, corporate governance, Indonesia, pay-performance sensitivity, two-tier board

JEL Classification: G34, J33, M12, M52

working papers series 

From TELKOM:

Corporate GovernanceThe current trend towards a digital society is reflected in the rapid pace of changes in various areas, from changes in consumer behavior to rapidly

evolving technology and on to aspects of formal regulation. This in turn requires organizations to develop the necessary capabilities in order to properly

manage the risk of changes, which eventually will reflect on the ability to ”think fast and act fast” as well as in (managing the unknown). Since 2004 and

continuing today, Telkom has persisted in developing and strengthening aspects of knowledge management as a vehicle for organizational and

employee learning. Our aim is to position Telkom as a center of excellence by focusing on the management of human resources and knowledge towards

creating competences that contribute directly on business success (from competence to commerce). This serves as the pillars of the practice of Good

Corporate Governance (“GCG”) towards the sustainable existence of the Company into the future.

CONCEPT AND FOUNDATION

The commitment to create a Company that is managed in a professional, transparent, efficient, accountable, trusted, free from conflict of interest, and

fair manner provides the foundation for the implementation of GCG practices at Telkom. Beyond compliance to prevailing rules and regulations at the

capital markets, GCG is seen as a key element for the successful achievement of an effective, efficient and sustainable business performance needed to

win the competition, and thus ensures that the Company could properly fulfill its obligations to its shareholders, customers, employees, business

partners, the general public, and other company’s stakeholders.

As Telkom’s shares are listed and traded at the BEI as well as NYSE, not only is the implementation of GCG shall conform to stipulations set out in the

Law for Limited Liability Company and the Indonesian Code of GCG as published by National Committee on Governance Policies (“KNKG”) in

Indonesia, but the effective practice of GCG shall also conform to the provisions of Sarbanes Oxley Act of 2002 (“SOA”) and other applicable rules of the

US SEC.

There are several provisions of SOA that apply to us, in particular, those under: (i) SOA Section 404 that require our management to be responsible for

the creation and maintenance of adequate internal control over financial reporting (“ICOFR”) to ensure the reliability of our financial statements and that

they are prepared according to the applicable accounting standards under Indonesia’s Statements of Financial Accounting Standards and/or the IFRS;

and (ii) those under SOA section 302 that require our management to be responsible for formulating, maintaining and evaluating the effectiveness of our

disclosure procedures and controls to ensure that information disclosed in reports is in compliance with the Exchange Act and is recorded, processed,

summarized and reported within the period provided and then accumulated and communicated to our management, including the President Director and

Director of Finance, so that they can take decisions related to required disclosures. For a further explanation regarding the results of management’s

review of ICOFR disclosure procedures and controls and related disclosures, please see section “Procedures and Controls”.

In regards the independence of audit, Telkom is in compliance with provisions issued by the OJK and the US SEC concerning the independence of Audit

Committee members.

In line with the transformation of our business portfolios into TIMES (Telecommunications, Information, Media, Edutainment and Services) businesses

managed by Telkom and subsidiaries, the implementation of GCG has been further strengthened and developed within a group GCG framework, or

subsidiary governance, involving all entities under the Telkom Group. The commitment to create subsidiary governance is indicated at the top level of

management through the issuance and signing of a Pact of Integrity as a testament of full commitment to the implementation of GCG the Company.

2012 was a year for the strengthening of GCG across the entire business group (subsidiary governance). The objective is to ensure that GCG

implementation is undertaken as part of and in harmony with, evolving business demands and changes in the industry, to which the Company has

responded with its business portfolio and organizational transformation. Through the Business Effectiveness Sub-Directorate, the strengthening of GCG

at Telkom Group is expanded throughout the business group towards the creation of ethical business practices (GCG as ethics) and the practice of

proven GCG principles as an inseparable part of day-to-day work activities (GCG as knowledge).

GCG EvaluationTo ascertain our GCG performance, we undergo an annual assessment by the Indonesian Institute for Corporate Governance (“IICG”), an independent

GCG rating institution in Indonesia. In its assessment process, the IICG conducted research and rated several public companies (issuers), SOEs,

including Telkom, and other companies using the Corporate Governance Perception Index (“CGPI”). At the end of the process, Telkom was declared

‘The Most Trusted Company’ in line with the 2011 GCG assessment theme of “GCG as ethics”.

The CGPI assessment had four stages, with each given a different weighting:

1. Self assessment: We were asked to complete a questionnaire in line with the GCG assessment theme;

2. Review of documents: We submitted policies, procedures and other evidence demonstrating our application of GCG;

3. Evaluation of papers and presentations: We prepared a paper describing our GCG activities in line with the assessment

theme and presented it to the jury; and

4. Observation: The jury visited Telkom to conduct question and answer sessions, observe and do an on-site review to

confirm the application of GCG in the Company, referring to the results of the self-assessment, document review and

paper assessment.

Apart from the IICG assessment, we were also frequently selected for observation by other GCG rating agencies as

we are seen as a benchmark or role model for other companies. Some of our other achievements with respect to GCG

evaluation are as follows:

1. Most Consistent Dividend Policy and Strongest Adherence to Corporate Governance Award;

2. An award from Finance Asia magazine in the “Best Managed Company” category;

3. The highest award, “Indonesia’s Most Trusted Companies”, on the results of the GCG assessment by

independent agencies the Indonesian Institute for Corporate Governance (IICG) and SWA magazine, with a

rating of “Highly Trusted”;

4. An “Indonesia’s Trusted Company” award, based on a survey of investors and analysts;

5. An award from the Indonesia Sustainability Reporting Awards (ISRA); and

6. A Best State-Owned Enterprises (SOE) award, and an award from the Indonesian Institute of Corporate Directorship

(IICD) in the Corporate Governance Practices in Public Companies in Indonesia category.

CORPORATE GOVERNANCE AND ACCOUNTING IRREGULARITIES: EVIDENCE FROM THE TWO-TIERED BOARD STRUCTURE IN INDONESIA

Jaswadi JASWADI, Nicholas Billington, Stella Sofocleous

ABSTRACT

This study aims to investigate the extent to which the Indonesian corporate governance mechanism acts as an

effective tool for protecting financial statements users against accounting irregularities. Considering that

accounting irregularities might occur in between error and the fraud act, this study reviews the literature on

minimizing the seriousness of these reporting incidences. The level of seriousness in misstatements is more

severe when: (1) there is absence of financial expert(s) on supervisory boards and audit committees, (2)

companies have short tenured-CEOs and poor internal control systems, and (3) auditors are solely appointed by

firms’ BOCs without agreement of block holders (known as referral). In addition, an examination of simultaneous

effects of each corporate governance dimension reveals a general weakness of the BOCs and their audit

committees. However, the BOC and audit committee could be an effective tool in mitigating reporting incidences,

especially when they show high-quality collaboration.

Company disclosure in Indonesia: corporate governance practice, ownership structure, competition and total assets

Examining the influence of internal and external factors on company disclosure

Author(s): Utama, C.A.Organization: Asian Journal of Business and Accounting (AJBA)Year: 2012Region(s) of Coverage: East and Southeast AsiaThemes: Governance

Overview Read This Document Papers by Same Organization

The purpose of this study is to investigate whether the extent of company disclosure in Indonesia is affected by external factors in addition to internal factors. Many previous studies relating to disclosure conducted in Indonesia only focused on the internal factors, e.g. corporate governance, ownership structure (blockholder) and total assets.Further, I address the possibility of non- linear relationship between ownership structure on company disclosure and also the impact of competition as an external factor to company disclosure level. This study employs Botosan Index and Herfindahl Index (HI) as a proxy for company disclosure and competition.The result shows that corporate governance practice, competition, and size have a positive influence on company disclosure leves.. When blockholder ownership is divided into three groups: low ownership (less than or equal 20%), medium ownership (between 20.1% and 50%, and high ownership (greater than 50%), I find that companies with medium blockholder ownership have a lower disclosure level than low ownership, while companies with high ownership have a higher disclosure level.Therefore, the existence of blockholder ownership ranging between 20.1% until 50% tends to yield the alignment effect whereas blockholder ownership greater than 50% tends to yield the entrenchment effect. Finally, the result also shows that leverage does not significantly impact on company disclosure.

Corporate Governance and Corporate Transparency of Indonesian Listed Companies  

 

IJAR Vol 15 No 3 2012

SAIFUL*

Universitas Bengkulu

PHUA LIAN KEE

HASNAH HARON

Universiti Sains Malaysia

Abstract: During Asian financial crisis in 1997, some Indonesian listed companies suffered by decreasing firm value and poor performance. The

dominant factors that contributed to Asian financial crisis are poor corporate governance and a lack of transparency. As an attempt to improve corporate

governance practice of Indonesian corporations, some reforms have been conducted by Indonesian regulatory authorities such as the code of good

corporate governance with the objective to maximize shareholder and firm value by enhancing transparency, accountability, reliability, responsibility, and

fairness. This study examined the relationship between those corporate governance attributes and corporate transparency of Indonesian listed

companies by exploring the purposive sampling method, 88 companies were selected as the sample of this study. The finding of this study showed that

board size and proportion of independent member on board positively affect corporate transparency. It means the corporate transparency will increase

since the companies have large board and higher proportion of independent member on boards. In contrast, the proportion of board of directors who

have family relationship is negatively associated with corporate transparency. It implies that family boards tend to advise management to disclose less

information to public (less transparent) since they can get the informational benefit by transferring that information to their family. Meanwhile, the

influence of family ownership, institutional ownership, management ownership, and foreign ownership on corporate transparency was not be supported

by this study.

Keywords: corporate governance, transparency, disclosure, and ownership

Structure

1. Introduction

Studies conducted by Asian Development Bank (ADB, 2000) indicated that important factors that caused Asia economic crisis 1997 were weak

corporate governance and a lack of transparency with regard to information disclosure. In 2001, the Credit Lyonnaise Securities Asia (CLSA) conducted

a study on disciplines, transparency, independence, accountability, responsibility, fairness, and social responsibility. Questionnaires were sent out to

financial analysts, the rating of Indonesian companies varies from 13.9% to 64.9% based on weighted average scores. In particular, Indonesian

corporations obtained the lowest score in transparency, discipline, accountability, responsibility, and fairness among the four Southeast Asian countries

i.e. Indonesia, Thailand, Malaysia, and Singapore. The findings also showed that Indonesia attained the lowest score of country macro aspects in

corporate governance among the 25 existing emerging markets (CLSA, 2001). Such weaknessesowed to concentration of ownership structure on

certain family and failure of board of directors in monitoring behavior of managers effectively. ADB (2000) also highlighted that ineffective board of

directors, weak internal control, poor audit, lack of corporate transparency, lack of legal enforcement are common corporate governance characteristics

among Asian countries’ corporation.

The ownership structure of Indonesian firms focuses on the first and second largest ownership (Husnan, 2001), and the first largest ownership is

dominated by family ownership (Classens et al., 2000), and family members are considered the dominant individuals in board of directors and

commissioners (Tabalujan, 2002). On the other hand, family based ownership can also cause little divorce between ownership and control. Reason

being, majority ownership has opportunity to control public companies. Moreover, it is believed that majority shareholders and board of directors tend to

expropriate minority shareholders in many ways (Classens, et al., 2000; Tabalujan, 2002).

The consequence of ownership and board structure, Indonesian corporations deals with lack of transparency (Chen et al., 2003). Utama (2003) had

reported that the average overall score obtained by Indonesian listed firm is 41.9% of the maximum potential disclosure based on index developed by

Botosan (1997). In addition, he also examined the level of compliance among listed banks to mandatory disclosure (i.e. bank central (BI) regulation and

the capital market executive agency (BAPEPAM) regulation). The results showed that the level of listed banks compliance is on average 58.3% to BI

regulation and 58.8% to BAPEPAM regulation. Based on the findings, he concluded that the compliance level of Indonesian listed firms to voluntary and

mandatory disclosure is low.

As part of the efforts to improve corporate governance practice of Indonesian corporations, government of Indonesia forms a national committee on

corporate governance (NCCG). Indirectly, the formation of this committee also aims to fulfill the requirement of International Monetary Fund (IMF).

NCCG released Indonesian code on good corporate governance on April 2001. One of the objectives of the code is to maximize shareholders and firm

value by enhancing transparency, accountability, reliability, responsibility, and fairness. In order to achieve its goal, NCCG focuses on monitoring system

for manager’s behavior by reforming composition of board of directors (board commissioners in Indone sian context). NCCG required that the board of

directors and commissioners must comprise with at least 20% independent members. Its reforms were based on the argument that qualified

independent members on board will be able to control managers and majority shareholders behavior effectively; therefore, minority right is protected.

At present, most of the Indonesian companies have reformed their composition of independent members on board directors and commissioners to at

least 20%. As a result, the percentage of companies with two or more family members on board has decreased from 59.8% in 1997 to 40.7% in 2001.

However, they still represent the dominant influence ones in board composition (Tabalujan, 2002).

The importance of corporate transparency has been considered by some scholars mainly related to firm value creating. This was based on information

asymmetry and signaling views. Based on agency and signaling theory perspectives, information asymmetry will influence the perception and behavior

of investors. Investors will value less the companies with high information asymmetry because they cannot predict and project the real value of those

companies. Meanwhile, corporate transparency will reduce information asymmetry which in turn will enhance firm value (Spence, 1973; Chiang, 2005).

Some studies which found corporate governance influence corporate transparency (see for examples Hossain et al., 1994; Warfield et al., 1995; Haniffa

and Cooke, 2002; Lakhal, 2003; Mak and Li, 2001; Ho and Wong, 2001; Eng and Mak, 2003; Chen and Jaggi, 2000).

Based on the above discussion, this research intends to examine the relationship between corporate governance structure and corporate transparency

among Indonesian listed companies

Concentrated Family Ownership Structures Weakening Corporate Governance: A Developing Country Story The Case of Indonesian Companies

Achmad, Tarmizi (2008) Concentrated Family Ownership Structures Weakening Corporate Governance: A Developing Country Story The Case of Indonesian Companies. MAKSI, 8 . ISSN 1412-6680

PDF1413Kb

Abstract

This research, project examines the effect of ownership structures on corporate governance. De-tailed analysis allowed for the identification of the ultimate owner by carefully tracing the chain of owner-ship. Our findings show that 62.86% of Indonesian firms are controlled by the owners who have a majority ownership and that 63.81% of firms are owned by an individual or group of family members. These ownership structures are mote inhibited than most other countries (Claessens et al. 2000). Yet, the percentage of independent board (commissioners) is only 39.12%. A majority of independent board members remains a rare event in Indonesia. Multiple regression analysis reveals that both ownership type and identity are moderately significant predictors for board Independence. Ownership structures In Indonesia do influence the level of board independence. This Indonesian pattern is a somewhat extreme but not uncommon scenario in Asian financial markets. Western solutions may not be applicable or effective. New rules and regulations may be needed to provide more protection of the smaller investors. Key words: Ownership structures, governance, developing countries

Ownership Concentration, Family Control, and Auditor Choice:Evidence from an Emerging MarketSalim DarmadiIndonesian Capital Market and Financial Institution Supervisory Agency (Bapepam-LK) Jalan Lapangan Banteng Timur No. 2-4, Jakarta 10710, IndonesiaIndonesian College of State Accountancy (STAN)Bintaro Jaya Sektor V, Tangerang Selatan 15222, IndonesiaThis version: 6 February 2012AbstractThis empirical study extends the existing, yet limited, literature on the influence of ownershipconcentration and family control on auditor choice. Following prior studies, a firm isconsidered using a higher-quality audit when its external auditor is one of Big 4 audit firms.The sample consists of 787 firm-year observations of public firms listed on the IndonesiaStock Exchange (IDX) in the financial years 2005-2007. Empirical evidence obtained revealsthat firms with larger ownership concentration are more likely to hire a Big 4 auditor. Hence, in such firms, high-quality audits are employed to mitigate agency issues. However,when the controlling shareholder is a family, the association between ownershipconcentration and demands for high-quality auditors turns negative, implying that family-controlled firms tend to sustain opaqueness gains by hiring lower-quality auditors

IFC Supports OJK in Improving Corporate Governance in IndonesiaTue, June 18 2013 11:28 | 545 Views

IFC Supports OJK in Improving Corporate Governance in Indonesia (ACN Newswire/ANTARA)

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     Jakarta, Indonesia, June 17, 2013 - (ANTARA) - IFC, a member of the World Bank Group, and Indonesia's financial services authority Otoritas Jasa Keuangan signed an agreement today to improve corporate governance standards in the country, which will help strengthen its financial system and lead to sustainable economic growth.

     IFC will advise and support OJK in developing a Corporate Governance Road Map to identify gaps and challenges in Indonesia's regulatory framework, covering areas such as shareholder rights, protection of minority shareholders, corporate board practices, and disclosure and transparency. They will also finalize an Indonesia Corporate Governance Manual, an instrument developed by IFC in many other regions to provide best practice guidelines to practitioners, board members and policymakers.

     "Indonesia needs to have a fundamentally sound and sustainable financial system that is capable of protecting the interests of consumers and society," said Muliaman D. Hadad, chairman of OJK. "To achieve that objective, OJK has initiated strategic initiatives to enhance corporate governance in Indonesia, such as the introduction of the Annual Report Awards. IFC's support to OJK will help us further raise the transparency and competitiveness of Indonesian public companies going forward."

     As an independent regulator, OJK recognizes the importance of a fair, transparent, and accountable governance system in the financial sector. Together with IFC, OJK will organize public events in order to disseminate the road map and the manual to the private sector.

     IFC established its corporate governance program in Indonesia in June 2012 and has conducted 10 seminars and conferences, such as a women leaders' forum, training for family businesses, and lectures at some Indonesian universities. IFC is also helping private firms improve their corporate governance practices.

     "Good corporate governance standards and practices help improve the competitiveness and sustainability of businesses, ultimately fostering economic development," said Sergio Pimenta, IFC Director for East Asia and Pacific. "Our cooperation with Indonesia's OJK will help strengthen the country's financial system."

     IFC has contributed to the development of 48 corporate governance codes in 32 countries. In East Asia and the Pacific, IFC produces an annual corporate governance scorecard for large Vietnamese listed companies; it has also partnered with China's Shenzhen Stock Exchange to enhance corporate board performance.

     About IFC

     IFC, a member of the World Bank Group, is the largest global development institution focused exclusively on the private sector. We help developing countries achieve sustainable growth by financing investment, mobilizing capital in international financial markets, and providing advisory services to businesses and governments. In FY12, our investments reached an all-time high of more than $20 billion, leveraging the power of the private sector to create jobs, spark innovation, and tackle the world's most pressing development challenges. For more information, visit www.ifc.org.

Corporate governance of family firms and voluntary disclosure : the case of Indonesian manufacturing firms / Tarmizi Achmad

Author Tarmizi, Achmad

Year 2007

Abstract Weakness in corporate governance and lack of transparency are often considered causes of, or contributors to, the Asian Financial Crisis. Publicly listed companies in Indonesia, like other Asian firms, have a concentrated ownership structure. Focusing on manufacturing firms listed on the Jakarta Stock Exchange (JSX) for the year 2003, this study adopts an agency framework to examine voluntary disclosures included in the annual reports of 149 Indonesian firms and their relationship to various attributes such as: ownership structure; whether a firm is family-owned or not; the owner's involvement in either the Board of Commissioners or Board of Directors; and whether the firm is affiliated with a business group. The results mostly support the notion that ownership structure affects the extent of disclosure in annual reports. First, the results show that, compared to firms with a

nonmajority ownership structure, voluntary disclosure is lower in firms with a majority ownership structure. Second, the results indicate that family owned firms are more likely to exhibit lower voluntary disclosure than are non-family owned firms. Third, the analysis shows that, among family firms, firms with a majority (compared to those with a non-majority) ownership structure are more likely to have lower levels of voluntary disclosure. Fourth, the results indicate that, among family firms, firms affiliated with a business group are more likely to make lower voluntary disclosures than independent firms. In contrast, the empirical analysis failed to support the hypothesis that, among family firms, voluntary disclosure would be lower in firms where the owners are involved in the Board of Commissioners compared to those where there is no owner involvement in the Board of Commissioners. Similarly, the results failed to support the hypothesis that, among family firms, voluntary disclosure would

be lower in firms where the owners are involved in the Board of Directors compared to those where there is no owner involvement in the Board of Directors. Robustness checks performed using alternate measures of disclosure and the degree of ownership structure did not substantially change the conclusions. This thesis contributes to our understanding of how family firms are governed and the impact of corporate governance on a firm?s level of voluntary disclosure. The results have implications for policy makers and regulators in Indonesia striving to improve corporate governance and transparency.