What's Up with SOE Governance

A number of state-owned enterprises (SOEs) and their subsidiaries have been in the spotlight because of various corruption cases or alleged corruption and cases of negligence, which have caused losses or potential losses to be borne by these SOEs.

The latest case is the alleged corruption case of Pelindo's pension fund.

Other cases that have been processed at the attorney office and court, or have been reported in various media include corruption cases at Garuda, Jiwasraya, Asabri, Pertamina (LNG), Krakatau Steel, PT INTI, Perum Perindo, Waskita Karya, Nindya Karya, Waskita Beton Precast and other cases that have been settled in court.

The many cases of corruption and abuse of authority in SOEs and their subsidiaries certainly raises the question: what's wrong with the governance in SOEs? SOEs have had governance guidelines for a long time, and these governance guidelines have also been updated several times.

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The governance reference regulates the general meeting of shareholders (GMS), the structure and activities of the board of commissioners, the board of directors, and other organs within the company, such as committees, for example the audit committee, the risk committee and remuneration committee.

Fraudulent acts committed by management in several SOEs have occurred for many years, it is just that in the last few years they have been exposed more massively.

Again, the number of fraud cases in SOEs raises the question: is there something wrong with SOE governance? Are the current governance guidelines inadequate so that they have to be readjusted or is there something wrong in their implementation?

Possibility of ‘fraud’

The move by the SOEs minister to report these cases to law enforcement is a good thing and must be appreciated. It shows the intention of the SOEs minister to rid SOEs of acts of corruption, which is also a signal that the SOEs minister is not involved and is not related to corruption activities that are detrimental to SOEs.

This is because so far there has been a public stigma that SOEs are cash cows from various parties (political cost), and corruption starts from the top or leaders.

However, reporting and handing over cases of fraud to law enforcement alone is not enough because if fraud has occurred, there are costs that must be borne by the company (sunk cost).

Far more important are preventive measures by the SOEs Ministry so that fraud does not occur in the future. The process of routine monitoring and evaluation to detect the tendency for fraud to occur is very important to do.

Fraud occurs due to opportunity or negligence, although based on several studies (agency theory) opportunity is the biggest cause of fraud. The opportunity is there due to a management position with control and access to data and resources of the company.

Instinctively, the management (agent) will maximize benefits for himself (several studies on agency problems have proven this). The act of taking advantage or to benefit from them, if conducted to the extreme, will lead to fraud, which will be detrimental to SOEs.

SOEs have had governance principles (good corporate governance index) for a long time.

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The governance points have been updated several times and adapted to business developments. Governance is often only assessed at the end, or only at certain times, for the fulfillment of requirements only, or for the purposes of contests and competitions.

Governance is only assessed at the end of the period and this assessment tends to only be a tool for the company. Assessment of governance at the end or at any point in time tends to be easily modified and manipulated to get a high score or to meet the wishes and needs of the management.

This momentary assessment certainly will not be able to realize the goals of good corporate governance. Good corporate governance should be carried out for every stage of the process and activities in the company.

With this governance point, SOEs should be able to avoid fraud if the principles of good corporate governance become a reference in every company activity truthfully.

The impact of the implementation of the principles of good corporate governance must always be measured on the achievement of company goals so that management can understand the importance of implementing the principles of good corporate governance within the company.

A sense of belonging

Commissioners are people who play a very important role in developing and maintaining company assets. The commissioner's function is not just a complement or a formality. Commissioners must have a strong instinct for potential losses incurred by management, either intentionally or through negligence.

Commissioners do not participate in managing the company but must always monitor the company's activities to ensure that the company is managed properly according to the principles of good corporate governance.

Commissioners that are appointed by the government must have a high sense of belonging to the company's assets; their responsibility is the same as that to their own assets.

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In several SOEs it is clear that this sense of belonging is lacking among the commissioners. Some SOEs cannot properly protect their assets, so they are used or seized by other unauthorized parties.

Improper control and ownership of assets will certainly cause potential losses in the future. Some of the statements and actions of the management and commissioners reflect that they easily give up on protecting the assets by providing compensation and even moving on by building infrastructure in a new location.

Some SOEs have several subsidiary companies. Even though many mergers or acquisitions have been carried out to form a conglomeration, there are still many subsidiaries. The position of commissioners in these subsidiaries is usually occupied by the director level of the holding company.

In several SOEs it is clear that this sense of belonging is lacking among the commissioners.

Appointing commissioners from the level of directors in the holding company is not wrong and illegal because the shareholders are the holding, but it is also not a requirement.

You can imagine the tight schedule of a director in a holding company who is then added to his duties as a commissioner in a subsidiary company. A similar thing also happened in holding.

Many company commissioners are taken from echelon II officials and above, especially those from the Finance Ministry and the SOEs Ministry, which already have many duties and responsibilities in their positions.

Commissioners should have the ability or knowledge and totality in representing shareholders. Commissioners must always be alert and aware of the principle of agency problems, and always put forward a skeptical attitude that management will always look for opportunities to "steal" in order to maximize benefits from a financial and workload standpoint.

Tresno Eka Jaya, Tax and Finance Lecturer at Jakarta State University

This article was translated by Kurnia Siswo.