Corporate Governance And Political Connections On Wealth Expropriation Among Indonesian Business Groups
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Date
2012-02
Authors
Harto, Puji
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Abstract
A decade after the 1997/98 Asian Financial crisis, Indonesia is still experiencing a low score on the effectiveness of corporate governance enforcement. The problem of wealth expropriation still persists due to high ownership concentration, domination of business groups and predominantly family-controlled firms. The overall objective of this study is to examine the role of corporate governance mechanisms and political connections to explain the extent of wealth expropriation through related party transactions. Related party transactions serves as a proxy for wealth expropriation and is examined from related lending, related borrowing, related party sales and related party purchases perspectives. The sample of this study was 127 public listed companies in the Indonesian Stock Exchange during the period of 1999-2008, resulted in 1270 firm-year observations. Dynamic panel data regression was used to test the hypotheses. The results of this study show that several internal governance mechanisms fail to discharge their monitoring role to wealth expropriation. Ultimate ownership structures and multiple directorships are more likely to support wealth expropriation. Director compensation and multiple commissionerships fail to act as effective monitoring mechanisms to curb wealth expropriation. Political connections tends to facilitate wealth expropriation and also acts as an impediment to the effectiveness of internal governance mechanisms. This research highlighted several contributions. In terms of theoretical contribution, this study examines the importance of agency problems between the majority and minority shareholders in explaining the role of corporate governance on wealth expropriation. This study also supports the path dependence model of corporate governance, where the uniqueness of a country„s characteristics such as institutional factor also shapes the direction of the governance process. This study finds that political connections acts as an impediment to the development of good corporate governance. As for the practical contribution, this research proposes some policy recommendations to make the board of commissioners function more professional and also calls on the use of regulation to limit the maximum number of directorships. Regarding related party transactions, this study suggests increased disclosure requirements concerning these transactions.
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Keywords
Corporate governance