Corporate Governance and the Incidence of Sanctions in the Indonesian Capital Market

A lack of prudent corporate governance practice has been identified as a significant contributor to the Asian economic crisis, which hit the region, including Indonesia, in 1997. In response to the crisis aftermath, in 2001, Indonesia implemented an improved set of corporate governance principles through the establishment of a national committee and corporate governance code. These corporate governance principles have also been incorporated into relevant laws and regulations. With the adoption of corporate governance principles, the remaining issue is the assessment of the effectiveness of corporate governance in Indonesia. On the one hand, reviews by the World Bank and the International Monetary Fund (IMF) (2004, 2010) have highlighted that Indonesia has mostly incorporated good corporate governance principles into its regulatory framework in the form of law, regulations and sanctions. However, these same commentators point out that corporate governance practices in Indonesia are often distant from what is required by regulation and code, and they recommended that Indonesia improve the effectiveness of its good corporate governance implementation and enforcement. Past studies have mostly focused on the effect of corporate governance on the behaviour of management, company performance, reporting quality and firm value. These studies appear less relevant for developing countries like Indonesia because the findings are inconclusive and are specific to the countries or regions in which the studies are conducted. Further, they are largely based on the conditions and environment of developed countries. Only a handful of studies have evaluated the relationship between corporate governance and the incidence of sanctions in developing countries. Even in these cases, the findings of these studies are subject to the legal, social and political environmental conditions of the economies in which they are conducted, and the findings have little or no relevance for the Indonesian situation. Further, Indonesia follows a civil law legal system and two-tier board system structure that differs from the one-tier systems found in many other countries. As such, in-depth analysis of corporate governance practices under a variety of governance structures and regulatory regimes, including under two-tiered systems such as that of Indonesia, is required