Sidharta Utama FEUI

1. Public dan Corporate Governance serta Pengaruhnya terhadap Kinerja PerusahaanSimposium Nasional AkuntansiManado, 26 September 2013 Sidharta Utama FEUI

2. Objectives To provide evidencesof public and corporate governance practicesin 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

3. Evidences on CG and PG Practices Acga – clsa cg country and company assessment Asean cg scorecard cg assessement on plcs Worldwide governance indicators

4. Corporate Governance: Aligning Corporate, Shareowner, Public Interests “An effective system of corporate governance must strive to channel the self-interest of managers, directors and theadvisorsupon whom they rely into alignment with the corporate, shareholderand public interest.” Ira Millstein Senior Partner, Weil Gotshal & Menges, LLP Senior Associate Dean, Corporate Governance, Yale School of Management Chair Emeritus, the Forum’s Private Sector Advisory Group 4 IICD

5. OECD Corporate Governance Principles IICD

6. 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

7. CG Watch market scores: 2007 to 2012 IICD

8. CG Watch: Market Category Scores 2012 IICD

9. ASEAN Capital Market Forum: Raising CG Practices with ASEAN CG Scorecard I I C D, Please do not distribute without IICD's permission

10. ASEAN CG Scorecard I I C D, Please do not distribute without IICD's permission

11. CG Scorecard: Results for Indonesia I I C D, Please do not distribute without IICD's permission

12. 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

13. 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.

14. 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.

15. Worldwide Governance Indicators, 2012 • The Worldwide Governance Indicators (WGI): • Aresearch 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. • Dataare 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.

16. Overall: Average Rank of Governance Indicators

17. Indonesia: Rank (%) of Governance Indicators over time

18. Public Governance, Corporate Governance and Firm Performance

19. PUBLIC GOVERNANCE AND CORPORATE GOVERNANCE ON FIRM PERFORMANCE Corporate Governance Public Governance Firm performance

20. IICD

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

22. Why do countries matter so much for corporate governance?(Doidgeet 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.

23. 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.

24. 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 legalinstitutions....”

25. Research Opportunities in the Relation between Governance and Accounting

26. 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

27. 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

28. 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

29. Suitability of governance mechanism in Indonesia • 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.

30. Suitability of governance mechanism in Indonesia • 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.

31. Suitability of governance mechanism in Indonesia • 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?

32. Suitability of governance mechanism in Indonesia • 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

33. 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

34. FUTURE RESEARCH: MODERATING EFFECT OF PUBLIC GOVERNANCE ON THE RELATION BETWEEN CG AND FINANCIAL REPORTING QUALITY Corporate Governance Public Governance Quality of Financial Report

35. 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 reviewand 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

36. TERIMA KASIH