.

Session-6
ETHICS AND CORPORATE GOVERNANCE

1
 What is “integrity”?
 Root: integrity
integration “integer”  whole or entire
integral
 Integrity: the quality of moral self-governance (L.S. Paine)
 Personal integrity: honesty, reflective, being committed (?)
integrated-self and moral actions
 producing right actions
 Corporate integrity: responsibility, transparency, accountability
 producing right corporate activities that
lead individuals, inside and outside,
to make right decisions and actions.
 Market integrity: transparency, accountability
 enabling individual members to take
right decisions and actions.
 What is “corporate governance”?
 Concerned with the in corporate entities.

balance of power codes of conduct, rules, policies,

procedures, etc.

 It is the by which business corporations are directed and

control. The CG structure specifies the
among participants (board, managers, shareholders
and other stakeholders) and spells out the for
making decisions on corporate affairs [company objective are set,
the means and monitoring performance are provided] [OECD]
Integrity and Good Corporate Governance
“contribute”

GOOD
CORPORATE
GOVERNANCE

“enable”
 HISTORICAL FOUNDATIONS
Traditional Management Professionalism
Management

r
separation of
ownership
from control

“managerial-
revolution”
 Theory of Governance
Basis: firm as a nexus of constantly re-negotiated contracts among individual
factors of production, esp. managers and investors (shareholders).
Agency problem: how “residual risk-bearers”(P) to control “decision makers” (A)
CG: how to put constraints/deterrents on agent (A) in order to reduce misallocation.
Solution: incentives for self-control through efficient markets for corporate control,
management, and information; Rel.: Owner-Manager-BOD (independent dir.)
Weakness: Mgr is in control of BOD and less dependence on owners (managerialism)

Basis: Mgr is not an opportunistic agent, but rather a steward of corporation.

CG: how to put guidance for attaining good performance of the corporation.
Solution: BOD consists of specialist executive directors
and
Basis: connection (vs. control), corporation as a set of relationships (vs. contract)
CG: network governance; how to adapt to the environment and maintain relationship
with stakeholders in order to attain good performance of the corporation.
Solution: BOD consists of stakeholder representatives or those maintain relationship
 Convergence of Governance in Globalizing World

Diversity of governance Global force Convergence

sed

Fairness Fairness
Responsibility Responsibility
Transparency Transparency
Accountability Accountability
Independency
 The Political Economy of Corporate Governance
The dominant process Dynamic co-evolution
in the history of in the history of
industrial revolution corporation

sustainable
development
Anglo-American model of corporate governance
German/European model of corporate governance
Japanese model of corporate governance
 Corporate Governance in Indonesia
 Following the Anglo-Saxon but two-tier model
 Supporting laws, rules, and policies
UU 8/1995 (pasar modal), UU 40/1997 (PT): implicit calls for GCG
Bapepam SE-03/PM/2000, BEJ 339/2001: GCG for all listed companies
UU 19/2003 (BUMN), Menkeu 11/2004: GCG for all state-owned companies
KNKG 2006: standardization of GCG
 Particular focus of interest: separation of BOC’s chairman and CEO
independent commissioners (non exec.)
audit committee
expropriation by major shareholders
Indonesian model of corporate governance
 Corporate Governance Comparisons
Characteristics USA UK Germany Japan Indonesia
Driving Shareholder Shareholder Stakeholder Stakeholder Shareholder
Philosophy Value Value Value Value Value
Governance Law, NYSE, Self-regulated Co-determi- Legislation Law, rules
regulation & SEC-rules nation Law
Board Single-tier Single-tier Two-tier Side by side Two-tier
structure (act as 2-tier) (external)
Performance effective and effective and effective effective and formality of
of the board responsive to responsive to monitoring responsive to governance
opportunity opportunity opportunity & super exe?
Board Predominantly 40-60%, but to Mix of stake- Internal small % of
membership external be increasingly holders, 50% except audit external
(80%) more external labor rep.
Monitoring Securities Securities Government Government Sec. markets
institution markets markets Government
Business Explicit code Explicit code Imbedded Imbedded in Imbedded in
ethics of ethics of ethics in law the culture the religion?