Corruption Perception Index and the Integrity of the Private Sector

Binziad Kadafi[1]

In February 2018, Transparency International released the 2017 Corruption Perception Index. In it, Indonesia received a score of 37 from a maximum score of 100 and ranks 96th out of 180 countries surveyed. Although Indonesia’s score remained, its position fell down from number 90 in 2016. Some argue that the unsatisfactory results are due to inadequate anti-corruption programs in the private sector. If the corruption in the private sector is also dealt upon, it will help to broaden the campaign against corruption.

The statement is interesting, albeit rather late, considering the momentum to discuss corruption in the private sector more seriously was actually there, when the government and the parliament ratified the United Nations Convention Against Corruption (“UNCAC”) through Law No. 7 of 2006 on Ratification of the United States Convention against Corruption. In the UNCAC, the idea of corruption in the private sector was first systematically introduced. 

Theoretically, many experts have elaborated on corruption in the private sector. Usually, the discussion regarding whether countries are able to regulate corrupt behaviours in the private sector originated from the exposition of two dichotomous theories of corporate governance. The theory of corporate governance itself explains the best ways to manage corporations, including on how the government is supposed to perform its role in dealing with corporations and the various interests they represent.

The first theory of corporate governance is the stakeholder theory. This theory states that the establishment of a corporation is a concession from the government and that corporations are indeed created as independent and separate legal entities. Consequently, the government has the authority to regulate the objectives, structure, and work procedures of the corporations, to ensure that they are managed in ways that guarantee the common good, including the benefits of the stakeholders.

The second theory is the shareholder theory. This theory views corporations as mere sets of contracts that bind the individuals involved in them in order to make profit. Hence, corporations are not separate and independent entities from the individuals. The shareholder theory states that corporations must be regulated in the best way so that shareholders can maximise their profits. This theory also encourages corporations to be managed by a board of directors whose members are elected by and accountable to the shareholders, and work on behalf of the shareholders.

Gerald E. Caiden (2004) once stated that the corporate governance model adopted by a society would direct the way that society defines corruption. Shareholder theory defines corruption primarily as pathology in the public sector. It is as if corruption has never occurred outside the public sector, and if it does, it is not considered to be significant, or only seen as an impact of corruption in the public sector.

Janet M. Dine (2007) added that in the corporate governance model that places shareholders as the main focus, the corporation is only seen as a property of and must serve the interests of shareholders. This has broad implications for viewing corporate behaviours. All considerations other than benefits for the corporation, including corrupt culture and practice, can be seen merely as negative externalities to be adhered or to be bargained away if possible. In this view, government regulations must be abolished so that the free market reaches its maximum efficiency. It is the free market, which in turn, will discipline the corporations, so that the country’s efforts to regulate how corporations must operate, including the criminalisation of wrongdoings, must be prevented or minimised.

How about Indonesia? Presumably, the shareholder theory still plays a very strong role in shaping the corporate governance model in Indonesia. The majority of the legal frameworks regarding corporate governance is still dominated by the view that the government must carry out a facilitative role rather than a regulatory one. With the enactment of Law No. 40 of 2007 on Limited Liability Company, however, the scope of corporate responsibility was expanded, starting from broadening of the category of companies that must be audited by public accountants, the introduction of independent commissioners, to the introduction of the limited concept of corporate social responsibility.

Nonetheless, Indonesia still tends to view corruption as a pathology in the public sector, and therefore, direct more efforts to eradicate corruption in the public sector. While in fact, the private sector contributes substantially to corruption in the public sector. Even internally, fraud and irregularities are found in various corporations.

The push to encourage greater eradication of corruption in the private sector will undoubtedly meet many challenges, both structurally and culturally. Therefore, the most sensible step to start is to immediately implement the UNCAC, which is already part of the government’s commitment and is widely known by Indonesians. UNCAC is a good place to start as it has several recommendations on how to improve the integrity of the private sector.

The UNCAC, for example, recommends that Indonesia prevents corruption in the private sector by introducing codes of conduct, avoiding conflicts of interest, and forming internal audit units in various companies. It also recommends the improvement of audit and accounting standards with stricter sanctions, of either civil, administrative, or criminal for any violations. Further, the UNCAC proposed that Indonesia considers the imposition of private-to-private bribery, which had its embryo already in Article 49 (2) a of Law No. 10 of 1998 on Banking and Article 63 paragraph (2) letter a of Law No. 21 of 2008 on Sharia Banking.

Besides the above, UNCAC also encourages collaboration between the private sector and law enforcement agencies. In relation to this, KPK has launched the “professionals with integrity” movement in cooperation with the private sector actors. The aim of this movement was to increase transparency and accountability of corporations, eliminate the practice of providing facilitation payments and bribes, and report any potential extortion or illegal levies by government apparatus or law enforcers.

In conclusion, the narrow concept of corporate governance in Indonesia has prevented the private sector from accomplishing its reform or achieving good corporate governance. Therefore, there should be a stronger initiative to expedite the reform in the private sector. The UNCAC can be used as an effective vehicle to broaden the Indonesian concept on corporate governance. Indonesia should start with preparing specific legislative interventions to incorporate the UNCAC recommendations related to the private sector to the Indonesian legal frameworks concerning corporate governance and anti-corruption measures.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official position of Hukumonline.com

 

[1] The writer is a lawyer at Assegaf Hamzah & Partners (AHP).

Binziad Kadafi[1]

In February 2018, Transparency International released the 2017 Corruption Perception Index. In it, Indonesia received a score of 37 from a maximum score of 100 and ranks 96th out of 180 countries surveyed. Although Indonesia’s score remained, its position fell down from number 90 in 2016. Some argue that the unsatisfactory results are due to inadequate anti-corruption programs in the private sector. If the corruption in the private sector is also dealt upon, it will help to broaden the campaign against corruption.

The statement is interesting, albeit rather late, considering the momentum to discuss corruption in the private sector more seriously was actually there, when the government and the parliament ratified the United Nations Convention Against Corruption (“UNCAC”) through Law No. 7 of 2006 on Ratification of the United States Convention against Corruption. In the UNCAC, the idea of corruption in the private sector was first systematically introduced. 

Theoretically, many experts have elaborated on corruption in the private sector. Usually, the discussion regarding whether countries are able to regulate corrupt behaviours in the private sector originated from the exposition of two dichotomous theories of corporate governance. The theory of corporate governance itself explains the best ways to manage corporations, including on how the government is supposed to perform its role in dealing with corporations and the various interests they represent.

The first theory of corporate governance is the stakeholder theory. This theory states that the establishment of a corporation is a concession from the government and that corporations are indeed created as independent and separate legal entities. Consequently, the government has the authority to regulate the objectives, structure, and work procedures of the corporations, to ensure that they are managed in ways that guarantee the common good, including the benefits of the stakeholders.

The second theory is the shareholder theory. This theory views corporations as mere sets of contracts that bind the individuals involved in them in order to make profit. Hence, corporations are not separate and independent entities from the individuals. The shareholder theory states that corporations must be regulated in the best way so that shareholders can maximise their profits. This theory also encourages corporations to be managed by a board of directors whose members are elected by and accountable to the shareholders, and work on behalf of the shareholders.

Gerald E. Caiden (2004) once stated that the corporate governance model adopted by a society would direct the way that society defines corruption. Shareholder theory defines corruption primarily as pathology in the public sector. It is as if corruption has never occurred outside the public sector, and if it does, it is not considered to be significant, or only seen as an impact of corruption in the public sector.

Janet M. Dine (2007) added that in the corporate governance model that places shareholders as the main focus, the corporation is only seen as a property of and must serve the interests of shareholders. This has broad implications for viewing corporate behaviours. All considerations other than benefits for the corporation, including corrupt culture and practice, can be seen merely as negative externalities to be adhered or to be bargained away if possible. In this view, government regulations must be abolished so that the free market reaches its maximum efficiency. It is the free market, which in turn, will discipline the corporations, so that the country’s efforts to regulate how corporations must operate, including the criminalisation of wrongdoings, must be prevented or minimised.

How about Indonesia? Presumably, the shareholder theory still plays a very strong role in shaping the corporate governance model in Indonesia. The majority of the legal frameworks regarding corporate governance is still dominated by the view that the government must carry out a facilitative role rather than a regulatory one. With the enactment of Law No. 40 of 2007 on Limited Liability Company, however, the scope of corporate responsibility was expanded, starting from broadening of the category of companies that must be audited by public accountants, the introduction of independent commissioners, to the introduction of the limited concept of corporate social responsibility.

Nonetheless, Indonesia still tends to view corruption as a pathology in the public sector, and therefore, direct more efforts to eradicate corruption in the public sector. While in fact, the private sector contributes substantially to corruption in the public sector. Even internally, fraud and irregularities are found in various corporations.

The push to encourage greater eradication of corruption in the private sector will undoubtedly meet many challenges, both structurally and culturally. Therefore, the most sensible step to start is to immediately implement the UNCAC, which is already part of the government’s commitment and is widely known by Indonesians. UNCAC is a good place to start as it has several recommendations on how to improve the integrity of the private sector.

The UNCAC, for example, recommends that Indonesia prevents corruption in the private sector by introducing codes of conduct, avoiding conflicts of interest, and forming internal audit units in various companies. It also recommends the improvement of audit and accounting standards with stricter sanctions, of either civil, administrative, or criminal for any violations. Further, the UNCAC proposed that Indonesia considers the imposition of private-to-private bribery, which had its embryo already in Article 49 (2) a of Law No. 10 of 1998 on Banking and Article 63 paragraph (2) letter a of Law No. 21 of 2008 on Sharia Banking.

Besides the above, UNCAC also encourages collaboration between the private sector and law enforcement agencies. In relation to this, KPK has launched the “professionals with integrity” movement in cooperation with the private sector actors. The aim of this movement was to increase transparency and accountability of corporations, eliminate the practice of providing facilitation payments and bribes, and report any potential extortion or illegal levies by government apparatus or law enforcers.

In conclusion, the narrow concept of corporate governance in Indonesia has prevented the private sector from accomplishing its reform or achieving good corporate governance. Therefore, there should be a stronger initiative to expedite the reform in the private sector. The UNCAC can be used as an effective vehicle to broaden the Indonesian concept on corporate governance. Indonesia should start with preparing specific legislative interventions to incorporate the UNCAC recommendations related to the private sector to the Indonesian legal frameworks concerning corporate governance and anti-corruption measures.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official position of Hukumonline.com

 

[1] The writer is a lawyer at Assegaf Hamzah & Partners (AHP).

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