IN THE JOURNAL | INDONESIA 360
Guidelines to `living less dangerously` in Indonesia
January-March 2018
By: Peter Verhezen, Ian O Williamson and Natalia Soebagjo

Second, structural institutional weaknesses or voids continue to put enormous premiums on particular relationships with the elite and to undermine best corporate governance practices, creating legal uncertainty and ambiguity. Being confronted with weak legal frameworks often results in intellectual property theft, complex labor laws, an ambiguous political system of patronage and unreliable legal enforcement. Being operational in an environment with a very different sociocultural and political mind-set and understanding, compared to a Western setting, often causes misunderstanding or outright management confusion. In addition, political risk assessments and “regulatory risk” – in the sense of frequent ad hoc rule changes, weak minority shareholder rights related to determining dividend strategy and takeovers, and allowing related-party transactions – complicate the usual business challenges in Indonesia. We suggest that developing and maintaining social capital – relationship building, or “guanxi” – may be instrumental in dealing with these institutional voids, especially filling some of the gaps related to weak legal enforcement and policy inconsistency in provincial regions. Social networking should not fall into the potential trap of nepotism and other asocial and immoral behavior. Obviously, although institutional political and judicial reform remains paramount, (international) business can and should be guided by and grounded in competitive merit, formal principles and fair procedures, and informal ways to stick to ethical practices, even if that would be “costly” in the short term.

In a nutshell, the proper use of social capital may be able to address some of the institutional voids, and ethical principles of integrity may be able to reduce potential conflicts of interest. When considering entering Indonesia for business, a think and act “glocal” adage, as in a beneficial interdependent assimilation of international standards with local customs, may help companies to overcome the structural institutional voids and potential conflicts of interest at the organizational level. Both social capital that enables maintaining an open dialogue with the political and business elite and an ethical environment within the company are underpinned by having strong “best” corporate governance foundations. Institutionalizing corporate governance practices also implies choosing the right local business partner who is willing to have skin in the game (at pro rata effective, paid-up capital investment) and having a detailed shareholders agreement that specifies the unique equity partnership roles, while clearly defining the duties and role of each of the board members to secure oversight of and advice to top executives.

It is obvious that in a market where institutional voids are rampant and asymmetric information puts international companies at a disadvantage, good and sensible risk management and appropriate emotional and moral intelligence aligned to technical skills are vital to survive. Mindful relationship-oriented and ethical leadership, being concerned with the company’s reputation in the market, sensitivity to individual and social responsibility in the organization, and the ability to fall back on proper institutionalized governance foundations of accountability and transparency can indeed successfully reduce some of those specific institutional and organizational pitfalls. Using social capital and emphasizing ethical values underpinned by strict corporate governance practices may allow foreign investors or joint venture partners “to live less dangerously” in Indonesia.

Peter Verhezen is an adjunct professor at Melbourne Business School, at the University of Melbourne.

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