To Stamp Out Corruption, Indonesia Must Make Honest Business Profitable

Jakarta Globe, Kanti Pertiwi, April 29, 2010

In the last month or so, the public has been bombarded with news of tax scandals involving sums that could have lifted millions out of poverty in our great nation. The relationship between private corporations and state officials — and the lack of oversight in that area — is again under scrutiny.

A naive perspective would be that the scandals are evidence of too many loopholes in our financial system. A better explanation is a chronic problem of bribery.

Looking at the latest data provided by the World Bank (in 2003), 44 percent of firms in Indonesia admitted to being expected to bribe public officials to get things done in customs, taxes, licenses and other government services.

On the same note, earlier this week the Hong Kong-based Political & Economic Risk Consultancy listed Indonesia as the most corrupt nation in the Asia-Pacific region. PERC studied the surveys on the perspective of executives as to whether an economy is corrupt. It is paradoxical for corporate governance theorists to expect would-be law-abiding business practitioners to have any effective control over their companies’ decision-making processes without some kind of regulatory transparency.

On one hand, there are those corporations that have fully adopted the spirit of ethical practice, while on the other, there are many others whose efforts are half-hearted at best.

In a preliminary study focusing on ethics in the workplace, the University of Indonesia found that policies varied widely across companies, even among those categorized as multinationals. One company may decide to integrate a full-day workshop on ethics into their induction program, while another sees no need. One respondent, a junior staffer from one of the largest multinationals in Jakarta, was convinced that payoffs to officials always occur off the radar of the rank and file; kept safely within the walls of the top management.

Employees from various companies also acknowledged that many aspects of daily decision making — outside the accounting or finance department — could put one’s integrity to the test. They cited examples of obtaining approval for claims in advertisements and escaping sanctions from spillover in the distribution of regulated products.

As far as a code of conduct is concerned, there is no consensuses on the degree of stringency or the severity of punishment for violators. Even if there are harsh punishments on paper, it rarely occurs that someone is taken to the ethics committee because, “we are all in the same boat.” If it does happen, it calls for whistle-blowers to act, but unfortunately they themselves are living under great threats — of being labeled “not a team player,” of missing promotions or even of losing their jobs.

A small number of companies in Indonesia, however, have tried to implement whistle-blower protection systems even though protection from the law for corporate crime is still absent. The lack of guaranteed protection, combined with our collectivist culture, has made it difficult to set up an effective whistle-blower system in our country, experts say.

Moreover, there is no specific institution with the authority to take measures against corporate irregularities. The government is moving slowly, choosing to leave it to the informal agreements that exist among business associations or other interest-based collaborations. Even the upcoming implementation of a law supposedly guaranteeing public access to information leaves us with the question of how we can enforce it effectively. Privately-held businesses are still as profitable as ever, thanks to “under the table” arrangements made by so-called civil servants.

When such corrupt alliances finally do get exposed, businesses continue to thrive, even when the person at the top of management is living behind bars (Artalyta is a case in point). Such blatant corruption calls for harsher regulations, such as the ones currently being discussed in Brazil, which include penalties ranging from fines of up to 30 percent of gross income to shutdowns of companies caught bribing officials.

The current state of “governance by relationship” is a great source of frustration for many businesses. Companies that are heavily monitored by their institutions in developed economies (think of the Foreign Corrupt Practices Act for US firms and the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions for members of the Organization for Economic Cooperation and Development) are the most prone to hefty sanctions, but at the same time they are being charged generally higher rates compared to their local counterparts, according to research. So for the sake of creating a going concern, they must strike the right balance between networking and breaking the law.

As far as societal contribution goes, our higher education curriculum lacks an emphasis on ethics. Talk with any business student and you’ll almost certainly find they are not fully aware of the workplace challenges that lie before them — busy are they are with case studies on corporate profitability, efficiency and branding strategies. The closest they come to ethics is corporate social responsibility instruction, which is often mistakenly interpreted as simply donating food and clothes to landslide victims or lending money to small businesses that happen to have potential revenue of Rp 200 million ($22,0) a quarter.

The government has yet to take a solid step toward a more systematic, integrated and sustainable approach to ethics education. This should include training education professionals to be role models on issues such as academic honesty and professionalism inside the classroom.

Academics argue that emerging economies such as Indonesia need to graduate from a system of personalized transactions to more impersonalized business with a third-party enforcer. As Columbia University professor Joseph Stiglitz has argued, informal networks necessarily breed cronyism, corruption and other institutional dysfunction. With the onset of free trade, companies must start embracing resource-based competition and leave behind networking-based competition.

According to some economic theorists, predictability only occurs as long as relationships can be maintained. That means that at a certain point, maintaining relationship will require too many resources. As a result, the needed transition will only take place once the cost of maintaining relationship-based governance starts to outweigh the benefits.

It is unnecessary to ask why businesses would want officials to make objective judgments when the businesses can dictate those judgments by spending just a fraction of the money they will eventually reap. It is a win-win situation for both the corrupt officials and the self-interested corporate leaders.

Unless a whistle-blower has the guts (and protection) to uncover such conspiracies, this relational type of transaction will continue to flourish. Whenever trust is a luxury, rules must be strengthened. And unless the systemic moral crisis is alleviated, we should expect further systemic crises in business, economics and industry, to hit our country in future.

Looking at the resilience of the existing corrupt institutions, we have a long road to travel to reach more rule-based governance in this nation.

Kanti Pertiwi is a lecturer in the Department of Economics at the University of Indonesia.