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Good Corporate Governance The Principles of Good Corporate Governance

10 CHAPTER II THEORETICAL BACKGROUND AND PREVIOUS RESEARCH

2.1 Good Corporate Governance

Corporate governance is described by Organization for Economic Cooperation and Development OECD, 2000 as the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of the right and responsibilities among different participants in the corporation, such as the board, managers, shareholders and other stakeholders. According to the General Guidance of Good Corporate Governance Indonesia, the board of directors are in charge and responsible for managing the company. The function of management of the company by the board of directors includes five main tasks. Those are:

1. Management

This function includes the task of formulating the vision and mission as well as the preparation of short-term and long-term programs. 11

2. Risk Management

This function includes the task of formulating and implementing the company ’s risk management system that covers all aspects of the companys activities.

3. Internal Control

This function includes formulation and implementation of the internal control system in order to maintain the companys assets and performance and fulfill regulations.

4. Communication

This function includes the task of ensuring good communication between the company and its stakeholders by empowering corporate secretary functions.

5. Social Responsibility

This function includes a clear and focused plan to implement corporate social responsibility.

2.2 The Principles of Good Corporate Governance

According to The General Guidance of Good Corporate Governance Indonesia 2006, GCG has the following principles: transparency, accountability, responsibility, independence and fairness. 12

1. Transparency

Companies should provide the information that relevant and accessible as well as easily to be understood by stakeholders to maintain the objectivity of business. Critical information related to the shareholders, creditors and other stakeholders should also be disclosed in a transparent manner.

2. Accountability

Accountability is an indispensable condition to achieve continuous performance. Therefore, the company must be properly managed in order to account for its performance in a transparent manner.

3. Responsibility

Companies must adhere to the regulations and implement responsibilities towards society and the environment. It aims to maintain the sustainability of the business in the long term and to be recognized as a good corporate citizen.

4. Independency

Companies must be managed independently. Each element of the company does not dominate each other and cannot be interfered by other parties. 13

5. Fairness

Companies should always consider the interests of shareholders and other stakeholders based on the principles of fairness and equality. The implementation of CSR is one of the principles of good corporate governance so companies that implement GCG should perform CSR program. The CSR implementation is in accordance with The General Guidance of Good Corporate Governance Indonesia 2006, the company must adhere to the regulations and implement CSR to the society as well as to the environment so it can maintain the sustainability of the business in the long term and to be recognized as a good corporate citizen.

2.3 The Fundamental Concept of Corporate Social Responsibility

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