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

Our research suggests that one way companies can navigate institutional voids is by developing strong local social capital. Social capital – the relational networks of a company’s members – will help managers and leaders gather information on what is actually happening within the company’s external environment and understand what are the available options for managing the situation. Social capital can be created by both the organization’s formal external social relationships and the informal actions and capabilities of leaders within the firm.

By effectively managing both formal and informal social networks, international companies can form constructive dialogues with external stakeholders that enhance their abilities to appropriately respond to external factors (eg, changes in government regulation or enforcement), while also enhancing their credibility and reputation. Although we all may wish for needed political and judicial reforms to make Indonesia (and other Southeast Asian countries) more politically progressive and less unstable, international businesses may be able to help promote these desired reforms. But overall, as writer Michael Vatikiotis noted in his book “Blood and Silk”: “formal institutions’ governing political activities often do not adhere to operating principles or overarching goals based on abstract ideals for the common good.” Most political power is personal and consequently there has been a lack of importance attached to institutions, with the exception of the Indonesian Corruption Eradication Commission, which wields some actual “institutional” power (although lately the agency has been under attack by self-righteous politicians who prefer to continue to promote patronage, relying on interpersonal networks rather than on institutions governed by rules that are predictable and more objective.) The result often is political impunity, which is why foreign businesses need to be pragmatic while at the same time adhering to their own values of integrity, to sustain their own corporate reputations.

Unilever, an early entrant into the Indonesian market, provides a good example of how formal practices can create beneficial informal social capital – to be clearly distinguished from its darker side: nepotism and patronage. The company consistently appoints a nonexecutive director to its supervisory board whose sole task is to develop and maintain good relationships with government institutions and officials. One benefit of this approach is that Unilever is able to maintain operational integrity and have an accurate understanding of its tax liabilities in an Indonesian environment where tax law and enforcement has fluctuated greatly over the years. Furthermore, these relationships have helped the company develop trust and respect, providing a certain benefit of the doubt that goes a long way in the complex and often ambiguous Indonesian business context.

The effective management of formal organizational relationships can be particularly useful in business sectors facing a high level of scrutiny. For example, Indonesia is the world’s largest producer of palm oil and the industry is a critical component of the Indonesian economy. However, the Indonesian palm oil industry is plagued by inconsistent government regulation and legal enforcement, resulting in negative behavior by some producers. As such, the industry has courted substantial local and international controversy due to concerns over deforestation, environmental sustainability and pollution. Several major environmental nongovernmental organizations have run campaigns against major clients of Indonesian palm oil companies in lucrative markets (eg, Europe and the United States). Under enormous pressure from nongovernmental organizations and faced with major institutional voids, and after a long and rather hostile relationship, some major Indonesian palm oil producers, including Wilmar (a Singapore-listed company) and Sinar Mas Group, have formed more constructive relationships with environmental groups such as Greenpeace, World Wildlife Fund and Friends of the Earth Indonesia. These relationships allow the organizations to gain information on how to address the huge environmental and social challenges attributed to the ever-increasing demand for palm oil in consumer products.

The consideration of social capital in the selection and development of senior organizational leaders can also be important to companies conducting business in Indonesia. For example, Trakindo Utama, the local representative of Caterpillar since 1971, has developed a very positive reputation within the market by attracting independent board members who carry impeccable reputations within the Indonesia market. Trakindo’s board looks after governance mechanisms within the company and helps the firm navigate between international governance and investment requirements and local demands by clients, suppliers and government officials.

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