The Journey of Corporate Governance

The starting point and meaning of corporate governance

Governance issues in the corporate and public sectors have received great attention since the last
two decades. This is because the existence of corporate governance has broad and critical
implications for economic development and social welfare. First, provide incentives and
performance assessment measures in achieving the success of a business. Second, it provides a
mechanism for the assessment of accountability and transparency in ensuring the increase in
welfare as a result of increasing company value and has been distributed evenly & can be
accounted for as in the definition presented by Cadburry (2002). "Corporate Governance is
concerned with holding the balance between economic and social goals and between individual
and communal goals. The governance framework is there to encourage the efficient use of
resources and equally to require accountability for the stewardship of resources. The aim is to
align as nearly as possible the interest of individuals, corporations and society. “However, the
alignment of different interests in the form of positive collaboration between the parties
concerned is not an easy problem to apply.

Corporate governance refers to the private and public institutions, including laws, regulations
and public institutions, which together govern the relationship, in a market economy, between
corporate managers and entrepreneurs, on the hand and those who invest resources in
corporations on other. This confirms the broader scope of the initial definition of corporate
governance, by referring to the role of private and public institutions as hard structures in
corporate governance. Over time, the definition of corporate governance has also evolved so that
experts have contributed to the color in defining the terminology of corporate governance better.
As stated by Monks and Minow (2004), “Corporate Governance is the relationship among
various participants in determining the direction and performance of corporations. The primary
participants are the shareholders, the management and the Board of director. “In this definition,
Monks and Minow places the position of corporate governance as an effort to maintain the
relationship between the three important actors in each corporation / owner, management, and
board of directors. However, after that came a more comprehensive definition put forward by
Clarke (2004) "Corporate Governance is about the way corporate entities are governed and
corporate governance is about the exercise of power over corporate entities".

History of Governance

The term governance comes from the ancient Greek word 'Kivernitis' which means oarsman or
helmsman; someone who captures a ship in stormy waters. (Kakabadse, Bank, and Vinnicombe,
2005). Based on another point of view Farrar (2001) states that etymologically the term
governance comes from the ancient French 'Gouvernance' with the essence of control and the
stated of being governed. Both of these opinions refer to the substance that the concept of
governance is not only related to procedures and rules of the game through a protocol, but also
includes various things related to leadership and decision making in an organization.

Historically, the emergence of an alternative model of governance has been marked by the
formation of the first joint stock companies, as a reaction to the development of trade
opportunities in the East and West Indies regions. The classic concept of a company or
corporation is based on various statutory rules or legislation developed in the mid-19th century.
The main key to establishing a corporation as a legal entity is through strict separation between
private ownership and the entity. The consequence is that a corporate entity has a life of its own
so that it is able to run continuously beyond the age of the owner-founder who has the right to
transfer ownership of the company. A further consequence of the pattern of separation of
corporate entities is that the owner's liability for corporate debt is limited to the amount of their
investment in the equity of the corporation and does not include the owner's personal assets.
However, ownership of the corporation remains the basis for owner control of a corporate entity.

Problems with corporate governance will always arise if there is a conflict of interest within a
company. Meanwhile, the conflict was caused by an imbalance of "strength" between the various
parties involved. Therefore, a clear set of rules is needed so that various organizational
instruments in a corporate governance system can carry out their functions to ensure the
safeguarding of the interests of various parties related to the company. And with this mechanism
in place, it is hoped that it will produce a further positive impact on the economic development
of a country in order to achieve the prosperity of society.

The Journey of Governance in Indonesia

Various governance issues became popular in Indonesia at the end of the 20th century, to be
precise following the economic crisis in mid-1997. Global governance issues have strengthened
again after the collapse of several world business giants such as Enron and Worldcom in the US,
as well as the tragedy of the fall of HIH and One- Tel in Australia at the start of the 21st century.
In further developments, the issue of governance became increasingly popular after multilateral
financial institutions such as the World Bank and the Asian Development Bank revealed that the
financial crisis that hit several Asian countries was partly due to poor implementation of
corporate governance. In this case, it is claimed that Indonesia is the country that has suffered the
most and has risen the slowest from the impact caused by the crisis.

In Indonesia, this economic crisis has developed and is multidimensional in nature, as it was
followed by a political crisis and various other domestic problems. This condition is
compounded by the weak mechanisms of various institutions that support the country's economy.
This situation is also getting worse with the low level of law enforcement as the last bastion
which is expected to guarantee the upholding of statutory regulations and the functioning of the
existing system. Moreover, during that period there was a large number of outbound Capital
Flights, so that technically the Indonesian economy could be considered bankrupt.

After that, the multilateral financial institution (IMF) came to offer an economic rescue program
to Indonesia. This institution requires improvement and enhancement of corporate governance
practices in Indonesia. The letter of intent signed by the Indonesian government at that time
together with the IMF can be considered the initial milestone in the start of the reformation
system of the national corporate governance system in a legal-formal manner. This was
manifested through the formation of a 'National Committee on corporate governance policies
(KNKCG)' through a coordinating ministerial decree on the equatorial sector in 1999 and the
following year a code of ethics was produced for the implementation of corporate governance
through 'Code for Good Corporate Governance' (2000).

Development of the implementation of Corporate Governance

In its development, especially during the decade of the 21st century. The implementation of
corporate governance in Indonesia has not shown significant progress. At least this is reflected in
the results of an annual survey conducted by Credit Lyonnais Securities Asia (CLSA) regarding
evaluation

The picture above shows that among the 11 Asia Pacific countries, Indonesia's position in
implementing corporate governance was in the last position in 2014. Only in 2010, Indonesia's
position was one rank better than the Philippines, but experienced a significant decline in the
2012 and 2014 survey periods.

Based on table 2, it can be seen that Indonesia's position is only slightly better for indicator
enforcement and political regulatory than the Philippines. However, the higher the two indicators
does not help improve Indonesia's position from the last ranking in the overall total assessment
score. The big hope for improving the implementation of corporate governance in Indonesia is
through the existence of the financial services authority (OJK) as a super regulator which is
expected to be a catalyst in implementing various reform efforts in the corporate governance
sector towards a better direction and able to sustain it.

The World Bank as a major institution has an interest and concern for the quality efforts of
implementing corporate governance in various countries. Because the World Bank believes that
it is necessary to identify and evaluate the quality of implementation of corporate governance in
each country as input for the government of a country in an effort to improve the quality of
corporate governance implementation. In this regard, the World Bank uses six main indicators: 1.
Voice and accountability, 2. Political stability / no violence, 3. Government effectiveness, 4.
Regulatory quality, 5. Rule of law, 6. Control of corruption.

Based on the assessment score given, the World Bank categorized the various countries within
the scope of the survey conducted into 4 groups. The first group is dominated by developed
countries and are generally countries that adhere to common law such as Australia. In this group,
the only country in the Asia Pacific region is Japan with a high enough score compared to other
European countries. The second group is generally dominated by European continental countries
such as Italy and France which adhere to civil law laws. Indonesia is in the third group category
with scores and rankings relatively consistent with the results of the ranking conducted by
CLSA. The lowest score for the country level Indonesia is on indicators of political stability / no
violence and this is thought to have occurred due to the transition period in political reform in
Indonesia.

Conclusion

The implementation of corporate governance in each country serves as a guide for potential
investors. If the corporate governance mechanism is properly implemented, the positive impact
will be sustainable and that is the importance of good corporate governance in an institution, be
it private or public. According to Black, Jang and Kim (2006), it proves that there is a causal
relationship between corporate governance ratings and company value, so that increasing
corporate governance rankings is an important thing for companies in various developing
countries.

References
Prof.Niki Lukviarman, M. (2016). Corporate Governance. Solo: Pt. Era Adicitra Intermedia.