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tock market performance may have been disastrous round the globe last year, but Indonesia was a happy exception. And if its Jakarta Stock Exchange FTSE Index recorded only 4.9 percent growth, such gains were an enormous advance compared with the 10 percent decline of the Global Index and the 18 percent slide recorded by the Asia Pacific Index.

Partly to blame here was the EU sovereign debt crisis, which affected the Euro Bloc Index, dragging it down by 17.8 percent.

Dividend yields on the Jakarta Stock Exchange (JSE) were not among the highest but then again, investors seemed to find other factors more important. These included the prevailing confidence in the Indonesian stock market, its resilience to international financial turbulence, the positive outlook for economic and political stability.

Add to these factors a business sector that is becoming better organized and increasingly applying good corporate governance codes, and we can understand why fared better than many others. The positive reading did not go unrewarded. Indonesia’s rising star was reflected in Fitch Ratings Agency’s stamp of approval last December, when it again granted Indonesia investment grade status after a 14-year lapse.

Indonesia is a prime example of an economy where awareness of the benefits of good governance principles like transparency, accountability, responsibility and fairness has increased dramatically since the 1997/1998 Asian financial crisis. Since then, the National Committee on Governance (KNKG) has been paving the way, issuing good corporate governance guidelines (GCG) in 2001, and revised guidelines in 2006.

Alongside the guidelines, KNKG has also been promoting general awareness of GCG through publications, public discussions and education and training (by the Center for Indonesian Managers and Commissioners or LKDI). It also has an annual report award for the company with the best corporate governance performance.

The path has not been easy. Two approaches have driven the implementation of good corporate governance in Indonesia. One is ethics-based, the other is regulatory. The regulatory approach is driven by initiatives, usually from the government, to force companies to comply with defined regulations. The ethics-based approach on the other hand is predominantly driven by the consciousness that doing business is not just about the pursuit of short-term profits but more about sustainability and healthy long-term relationships with stakeholders.

The approach chosen in Indonesia has been the voluntary, ethics-based approach. And it has worked. Over the years more and more listed companies have introduced corporate governance codes. In 2006, some 53 percent of the 45 largest blue chip companies on the JSE had understood the message. By 2009, this percentage grew to around 83 percent.

The last two decades have seen a flurry of initiatives around the world to improve corporate governance. Ideally, the adoption of a corporate governance code should make it easier for a firm to raise funds in debt and equity markets from outside investors, leading to a lower cost of capital and a higher value of the firm. Corporate scandals around the world have encouraged acceptance too. Good corporate governance may be a priority for policymakers and institutions like KNKG, but companies are not always convinced.

However, evidence of the financial and economic benefits of good corporate governance is mounting. As the charts below demonstrate, there is a clear connection between rising share prices and corporate governance acceptance in Indonesia.

It is easy to understand why international investors are increasingly keen on companies meeting good corporate governance requirements. Companies adhering to corporate governance codes are viewed as less risky. They also conform to the demand by an increasingly vociferous public for greater social responsibility on the part of corporations.

The Principles for Responsible Investment (PRI) drawn up in 2005/2006 by the United Nations in conjunction with some of the world’s biggest institutional investors, have also helped. Signatories undertake to adhere to PRI guidelines on environmental, social and governance (ESG) issues. This in turn influences the composition of their investment portfolios.

Currently over 979 institutions managing assets worth more than US$30 trillion have endorsed these UNPRI principles. Faced with poor returns from equity and bond markets in the West, institutional investors are looking more and more to emerging markets with good growth prospects, and when it comes to stock selection, companies with corporate governance adherence may have an advantage.

As we can see from chart 1, Indonesian shares have consistently outperformed those of other countries in the Asia Pacific Region since 2006. The gap between them has widened dramatically as Indonesian share prices surged, a trend interrupted only temporarily by the financial crisis that was triggered by the collapse of Lehman Brothers in September 2008.

Also worth noting is the sharp rise in the IDX index that started from 2006 onwards, the year good governance promoter KNKG introduced its revised code of good corporate governance.

To claim a direct causal link only on the basis of trends in share price (chart 1) would be going too far. However, a direct relationship can be seen to exist when we compare the good corporate governance compliance of Indonesian listed companies and their share price performance. Chart 2 demonstrates a statistically significant relationship (positive correlation) between these two variables.

This relationship is highlighted primarily in emerging markets. Typically, modern investors sensitive to the public mood, tend to make good governance performance an element in their portfolio choice and buy the stock. By the same token, evidence of bad governance tends to be penalized by stock dumping.

The positive effects of KNKG’s good corporate governance guidelines have become increasingly evident in Indonesia. They have also brought great financial and status benefits to financial market authorities in Indonesia and to those listed companies involved. The rate at which good corporate governance guidelines are being implemented is picking up speed and that augurs well for the future.

Still more needs to be done to achieve a proper balance. Greater interaction and dialogue between government, business and public is needed to encourage companies to implement good corporate governance principles further. For KNKG, even more political and financial support from central, local government, financial and stock market authorities would be more than welcome.

The writer is the managing director of ASPEC Consultancy in the Netherlands. The opinions expressed are his own.