Governance and Financial Reporting Quality SNA

Public dan Corporate Governance serta
Pengaruhnya terhadap Kinerja Perusahaan
Simposium Nasional Akuntansi
Manado, 26 September 2013

S I D H A R TA U TA M A
FEUI

Objectives
2

To provide evidences of public and corporate

governance practices in 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


Evidences on CG and PG
Practices
A C G A – C L S A C G C O U N T R Y A N D C O M PA N Y
ASSESSMENT
ASEAN CG SCORECARD CG ASSESSEMENT
ON PLCS
W O R L D W I D E G O V E R N A N C E I N D I C AT O R S

Corporate Governance: Aligning
Corporate, Shareowner,4 Public Interests
“An effective system of corporate governance must
strive to
channel the self-interest of managers, directors
and the advisors upon whom they rely into
alignment with the corporate, shareholder and
public interest.”

Group


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
4

IICD

OECD Corporate Governance
Principles
5

Ensuring the basis for an effective corporate
governance framework
Protecting Rights of Shareoweners
Equitable Treatment of Shareholders
Respecting Rights of Stakeholders
Disclosure and Transparency
Responsibilities of the board


IICD

CLSA - ACGA CG Watch 2012
6

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

CG Watch market scores: 2007 to 2012

7
(%)

2007

2010

2012

1. Singapore

65

67

69

Improving, but culture needs to open more

2. Hong Kong


67

65

66

Static, but reinvigorated regulator positive

3. Thailand

47

55

58

Improving, but corruption a major issue

4. = Japan


52

57

55

Government stalling, companies opening

4. = Malaysia

49

52

55

Culture at last showing signs of openness

6. Taiwan


54

55

53

Rules improving, but still behind the curve

7. India

56

48

51

Enforcement up, Delhi an obstacle

8. Korea


49

45

49

Government more open, chaebols closed

9. China

45

49

45

Rules improve, but culture still weak

10. Philippines


41

37

41

Improving, but will it be sustained?

11. Indonesia

37

40

37

Regressing, but new regulator may help

Source: Asian Corporate Governance Association


IICD

Trend of CG reform

CG Watch: Market Category Scores
2012
8

Market category scores
(%)
Total

1. Singapore

69

2. Hong Kong

66


3. Thailand

58

4. = Japan

55

4. =
Malaysia

55

6. Taiwan

53

7. India

51

8. Korea

49

IICD

 

 

CG Rules &
CG
Practices
Culture

68
54
62
53
62
50
45
53
52
38
50
46
49
43
43
34

 

 

Enforcement

Political &

IGAAP

Regulatory

64

73

87

68

71

75

44

54

80

57

52

70

39

63

80

35

56

77

42

56

63

39

56

75

ASEAN Capital Market Forum: Raising CG Practices
with
ASEAN CG Scorecard
9

ASEAN CG
Scorecard

Enhancing CG
Rules/Standards

Improving
Compliance with
Rules/Standards

I I C D, Please do not distribute without
IICD's permission

Encouraging
Voluntary
Adoption of CG
Practices

ASEAN CG Scorecard
10

Regionally
Developed

Globally Based
• OECD CG
Principles
• Other
International
and Regional
Standards

• Six
participating
countries
• Move beyond
local
rules/standar
ds

I I C D, Please do not distribute without
IICD's permission

Public
Information
• English
• Easily
Accessible

CG Scorecard: Results for Indonesia
11

120
100
80
60
40
20
0
Maximum
Average
Minimum

I I C D, Please do not distribute without
IICD's permission

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

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.

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.

Worldwide Governance Indicators, 2012
The Worldwide Governance Indicators (WGI):
 A research 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.
 Data are 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.

Overall: Average Rank of Governance Indicators

Rank (%)
100
90
80
70
60
50
40
30
20
10
0

g re an an th ia nd ia ia es m na
n
s
s a
d
a
i
o p
u
n
o
In one pi etn Ch
K ap Ja aiw So lay ail
g ng
a
T a,
h
d ilip Vi
n
T
i
n
M
o S
e
I
r
H
Ph
o
K

Rank (%)

Indonesia: Rank (%) of Governance Indicators over time

50.0
45.0

Voice and Accountability
Political stability and
Absence of violence
Government Ef fectiveness
Regulatory Quality
Rule of Law
Control of Corruption
Average

40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
Year 1998

Year 2005

Year 2011

Public Governance, Corporate
Governance and Firm
Performance
18

PUBLIC GOVERNANCE AND
CORPORATE GOVERNANCE ON FIRM
PERFORMANCE
Corporate
Governance

Public
Governan
ce

Firm
performance

19

IICD

20

Government Quality and Corporate
Governance
(Fan et al.2011)
21

 “...the

extent to which government officials' and
politicians' decisions benefit the citizen they serve, and
whether the decisions are made and 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).
 having complex organizational structures, poor
transparency and weak corporate governance (e.g.,
Leuz and Oberholzer-Gee, 2006; Fan et al., 2009; Jiang
et al., 2010).

Why do countries matter so much for corporate
governance? (Doidge et al. 2004)
22

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.

Legal System and CG (Klapper and Love, 2004)
23

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.

Moderating Effect of PG on the Impact of CG on Loan
Contracting
24

Ge et al. (2012): “favorable

effect of firmlevel governance on some loan contracting
terms is stronger in countries with strong
legal institutions....”

Research Opportunities in the
Relation between Governance
and Accounting
25

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

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

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

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.

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.

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?


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

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

FUTURE RESEARCH: MODERATING EFFECT
OF PUBLIC GOVERNANCE ON THE
RELATION BETWEEN CG AND FINANCIAL
REPORTING QUALITY

Corporate
Governance

Public
Governan
ce

Quality of
Financial
Report
34

References
35
 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.acgaasia.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 review and 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, 413432.
 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

TERIMA KASIH