Business

Shaping governance in Indonesian
family businesses

Past economic crises have served as a constant reminder that observance of modern corporate governance principles continues to be a clear reflection of corporate commitment to responsible citizenship.

Both corporate governance and responsible citizenship draw inspiration from the fundamental principles of fairness, transparency and accountability.

While the principles of, and the culture behind, corporate governance are fundamentally the same everywhere, the practices and approaches to improving those practices do vary from one country to another.

The traditional approach taken to raise the standards of corporate governance practice has been to empower the corporate board. Corporate governance, therefore, is about shaping the leadership of the corporate board.

Board empowerment has assumed a high priority in many industrialized countries, where there has been an “agency problem”. However, in many other emerging economies, including Indonesia, the corporate governance problem has not been a Western-style “agency problem”. Where controlling owners take on the prerogatives of the board as well as the reins of management there may not be much of an agency problem.

The problem may well be one of checks and balances to prevent owners from committing self-dealing and related abuses. These problems have been more significant and widespread in countries where the majority of businesses is owned and controlled by families or groups of close friends.

Family-owned corporations are one of the foundations of the business community. Their creation, growth and longevity are critical to the success of the national and global economy. In Indonesia, more than 90 percent of businesses are family-owned and controlled corporations. Although facing many of the same day-to-day management issues as publicly owned companies, they must also manage many issues specific to their status.

Many of the issues faced in family businesses are akin to those faced by many ordinary citizens in their day-to-day family life. Thus, there is a close inter-relationship between how a family nurtures and upholds its values and how a family-owned corporation shapes and upholds its corporate culture.

In fact, in many cases it is the family as the oldest formal institution in man’s history that actually defines the future and direction of any human secular activities, including business undertakings; not the other way around. When the families (values) are breaking down, sooner or later the future of the businesses they own will be at risk.

But, family members come and go. The corporations, on the other hand, are built to last for many generations to come. It is very crucial, therefore, that these corporations are built upon a solid foundation that is laid and created by the first generation of the families.

It is the first generations that actually set the tone at the top for the future and sustainability of many successful family-owned corporations. They can do this by creating a “Family Constitution or Charter” where the path of good corporate governance and family business principles cross each other and a clear guideline on how the family and business matters are treated is drawn.

Family corporations have to strive to be as well-managed as the best of their competitors. The need for a professional business approach is in fact greater in a family than in a non-family corporation. Family corporations also have distinctive characteristics from which they can derive a significant competitive advantage.

A long-term perspective comes from building a business for future generations while the strength of most family corporations’ founding values give them a clear identity in an increasingly faceless corporate world.

But there are also risks associated with this type of corporation, most notably the dissension that may arise within families, particularly between family members who are actively working in the business vs those who are solely shareholders.

Thus, four key issues related to family business corporate governance need to be highlighted: (1) Recruitment system that allows willing family members to be employed should be balanced with a performance-based promotion that is resolutely the same for both family and non-family managers; (2) fairness and transparency in financial and non-financial perks and reward systems, particularly within the family, to avoid tensions over perceived injustices; (3) more formal organizational structures to clarify roles and to separate the day-to-day management from the strategic direction of the business; and (4) a regular and proper channel of communication among family members to keep the integrity and unity of the family.

A well-functioning corporate governance system also needs the expertise of non-family executives. Successful family corporations need to establish a board devoted to strategic business issues and ideally comprise members – family and non-family – with a balanced skills and expertise. The family, on the other hand, needs to be constantly involved and informed, preferably through a family council or family office.

A board allows a family corporation to establish clear lines of authority for different areas of the business. It ensures the stability and continuity of the policies and values that distinguish the firm. It also makes a necessary distinction between matters of day-to-day management and issues of strategy. Boards allow the infusion of new ideas and a broader range of experience from having outside directors/commissioners included.

Corporate boards need to be deeply conscious of their fiduciary duties. They need to ensure that all shareholders and other stakeholders as well are treated fairly. Boards need to be in a position where they can exercise independent judgment for the best interest of the corporation as a whole.

To live up to its role as a responsible corporate citizen, an effective board, a logical organizational structure, fair and transparent recruiting and promotion policies and open and free communication among family members are the key drivers to ensuring the longevity and success of a family corporation.

Finally, a family-owned corporation must also be able to go beyond the future of its own business and welfare of its own family. It must be able to address two important challenges: Grow the business and at the same time increase stakeholders’ values through their positive contributions to a wider community.



The writer is a vice president of PT Asia Select Indonesia and senior advisor of the Family Business Network in Indonesia.

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