Guidelines to `living less dangerously` in Indonesia
January-March 2018
By: Peter Verhezen, Ian O Williamson and Natalia Soebagjo

Yet, even with the dual-board system, the implementation of innovative governance practices can lead to positive business outcomes. For example, the partnership between the Indonesian national telecommunications company, Telkom Indonesia, and the Singaporean investment company Temasek Holdings illustrates how good governance structures can support successful multinational partnerships. Telkom partnered with Temasek to form the mobile phone business Telkomsel. In order to reduce potential conflicts of interest between majority and minority shareholders, Telkom implemented governance reform whereby the supervisory board of the company was directly involved in supporting and simultaneously supervising the executive board. For example, any investment higher than $10 million required a consensual decision by a unified board. Having the supervisory board more transparently involved in key investments and key appointments created a more coherent and consistent policy- and decision-making process, which has helped create a financially successful business. Telkomsel is the Indonesian market leader in terms of mobile revenue with a 56 percent market share in 2016.

However, even if formal corporate governance practices are in place, there is still a need to go beyond legal compliance to help insure against conflicts of interest between Indonesian and non-Indonesian partners. In the Indonesian culture, as in other Asian cultures, close personal relationships are a foundational element of how individuals conduct business. However, these informal networks – based on the reciprocity principle of koneksi (useful connections), hutang budi (as in a debt of gratitude) and to a lesser extent the traditional Javanese community-based practice of gotong royong (sharing the burden of community work) – are admittedly often not transparent and can easily turn into nepotistic or even corruptive relationships, leading to the misuse of economic and political power. Hence, the importance of investing in policies and practices that guide and shape executives’ and managers’ understanding of what is appropriate behavior, and not allowing these relationships to lapse into patronage, nepotism and clientelism. In other words, competence that is often lauded as a crucial strategic asset may be a cornerstone for any successful company, but the character of the organizational leadership is as crucial as the North Star in navigating stormy weather. This is especially true in an Indonesian context, where, unfortunately, patronage often trumps meritocracy.

Unilever, a well-known and extremely successful global conglomerate in the Indonesian market, has taken a zero-tolerance stance on corruption with its work force. The corporate narrative goes that several years ago, when one of Unilever’s best Indonesian sales teams was caught offering a $4,400 bribe to a potential customer, a very small amount compared with the team’s annual remuneration package and the total revenue it generated, the team was unceremoniously fired without a warning letter. Similarly, Unilever will not negotiate with tax officials to reduce its overall tax obligation, although they have a nonexecutive director on the supervisory board whose primary focus is keeping good relationships with government officials. This zero-tolerance approach has brought Unilever Indonesia a stellar reputation over all these years. Similarly, Astra, a diversified conglomerate and consistently considered one of the best-managed firms in Indonesia, has been characterized by a high-quality code of conduct and extensive ethics training. Furthermore, the firm has invested heavily in training and development programs for young managerial talent to help guide and develop employee behavior. Publicly listed, Unilever Indonesia and Astra are both considered attractive stocks for international investors, rated among the best-governed companies in Indonesia, and are also rated as attractive places to work for local managerial talent.

Navigating institutional voids

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