IN THE JOURNAL | INDONESIA 360
Guidelines to `living less dangerously` in Indonesia
January-March 2018
By: Peter Verhezen, Ian O Williamson and Natalia Soebagjo

Similarly, an Australian mining company invested heavily in developing an Indonesian mine but dramatically misread the Indonesian business context, leading to major losses. The corporation neither had a reliable local partner nor access to local managerial talent to deal with contradictory pressures from stakeholders. Furthermore, Indonesia’s underdeveloped governance structure left the local subsidiary strategically clueless. The promising venture completely failed and the Australian company had to sell its stake at a multimillion-dollar loss. These examples illustrate why understanding and adapting to the Indonesian business context, while maintaining international standards, is critical for international companies hoping to avoid the pitfalls and pain suffered by other international firms, and as such “live less dangerously” in Indonesia.

Challenges and obstacles

Our research suggests that organizations operating in Indonesia by either starting a joint venture, directly investing through mergers and acquisitions, investing in the local capital market, setting up operations or directly selling products through local distribution channels face structural challenges and organizational obstacles – besides the usual strategic competitive forces. These obstacles stem from two sources: first, weak institutions and an unreliable legal system that lead to institutional voids; and second, potential conflicts of interest at the company level. Combined, these can create threats to organizational reputation and financial performance.

Besides the macroeconomic issue of institutional voids, specific organizational obstacles add additional complications to doing business in Indonesia. The Indonesian economy is dominated by state-owned enterprises and family businesses, resulting in potential conflicts of interest at a microeconomic level, stemming from concentrated local organizational ownership. More than 70 percent of the 50 largest firms in Indonesia based on revenue (or market cap) are either state-owned enterprises or family conglomerates. Indeed, it has been estimated that today, about 58 percent of all assets in Indonesia listed on the Indonesia Stock Exchange used to be controlled by 10 major families. Admittedly, since the 1997 financial crisis, some of that power in the hands of Chinese conglomerates (especially the banks) has been dispersed. Nonetheless, this high ownership concentration – among the highest in Asia – creates an environment where minority shareholder rights may not be duly respected. Minority shareholder rights can easily be undermined by biased decision-making or even expropriation of valuable assets by family majority shareholders. These potential conflicts of interest are mainly due to specific characteristics in Indonesia: extensive cross-ownership ties with pyramidal ownership structures; extensive family ownership with a high degree of overlap between controlling family ownership and management; significant state ownership with direct political influence over management appointments; and the relatively limited use of professional managers in top management. Taken together, they create a situation where international players may face profound governance risks.

Corporate governance within Indonesian listed and unlisted companies lags behind the standards of other Asia-Pacific countries, such as Malaysia and Thailand. Analyzing the boards of a number of the top 85 companies listed on the Indonesia Stock Exchange, only a few can be considered as conforming to best corporate governance practices. For example, one of the authors of this essay was involved with the initial public offering of a private local company. However, in the IPO process the name of a primary shareholder did not appear on the shareholders’ list of the newly listed company. Through a complicated pyramidal structure, the well-connected patriarch was hidden from the public eye.  This practice is not uncommon in Indonesia, as key businesspeople within Indonesian conglomerates attempt to “keep a low profile” to avoid both public and government attention. However, there is increasing pressure from both regulatory authorities and minority investors to fully disclose beneficial ownership.

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