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Omnibus and governance
Unless the enforcement of laws is not strengthened to build up a stronger good corporate governance system within the business sector, the upcoming omnibus laws may be rendered less effective to boost investment.
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Thousands of labors from the Indonesian Worker Union Confederation (KSPI) march on the street in front of the House of Representatives (DPR) building complex in Central Jakarta to protest the omnibus bill on job creation on Monday, Jan 20, 2020. (JP/Moch. Fiqih Prawira)
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ublic debate has been preoccupied since last year with the drafting of three omnibus bills on job creation, taxation and the strengthening of the financial system. The hurly-burly of the reform drive, which will amend hundreds of laws and thousands of clauses to remove overlapping and contradictory regulations, seems to have inflated expectations that most of our economic ills can be cured with omnibus laws.
Theoretically, omnibus laws would most likely be much more effective than the 16 reform packages President Joko “Jokowi” Widodo signed between 2015 and 2019 to boost investment. But the most optimistic estimate tells us that the entire political process for the enactment of the omnibus laws, including the issuance of government regulations and ministerial decrees on the technical details for the omnibus law enforcement, would take more than one year to complete.
In the meantime, our economy is already confronting big barriers to investment, notably portfolio capital flows. The findings of independent audits of a dozen state enterprises and a number of companies listed on the Indonesia Stock Exchange over the past few months have revealed just how utterly bad governance is at many big enterprises.
This is quite worrisome because good corporate governance (GCG) and responsibility are the foundations of the market economy. It embodies the rules and practices that govern the relationship between the managers and shareholders of corporations, as well as stakeholders such as employees, pensioners and local communities, and ensures transparency, fairness and accountability.
Unless the enforcement of laws is not strengthened to build up a stronger GCG system within the business sector, the upcoming omnibus laws may be rendered less effective to boost investment.
GCG is a key part of the contract that underpins economic growth in a market economy and public faith in that system. Many studies have concluded that there is a link between improved corporate governance and more predictable investment flows, and the long-term competitiveness of the financial service industry. The recent spate of financial scandals and breakdowns in truthful accounting and internal control at publicly-listed companies has begun to undermine people’s faith in financial reporting, corporate leadership and the integrity of the market.
GCG is a prerequisite for the integrity and credibility of market institutions. By building confidence and trust, good governance allows the corporation to have access to external finance and to make reliable commitments to creditors, employees and shareholders. When this trust is undermined, lenders and investors lose their appetite for risk, and shareholders offload their equity, resulting in lost value and reduced availability of capital. Clearly, the importance of GCG goes far beyond the interests of shareholders in an individual company. The GCG principles of transparency and accountability are the bedrock of the market system.
This underscores widespread public and hence political interest in reinforcing GCG practices. Such concerns become even more important in wooing foreign investment as the full benefits of free capital flows will only be realized if there is mutual understanding with regard to the basic elements of GCG.
