Kiroyan Partners - Noke KiroyanIn the world of international trading, a term known as Korea Discount is widely known. The term does not refer to a discount or rebate in its true sense, but rather a reduction in the value imposed by the international market on securities, especially share certificates, issued by listed South Korean companies.

The phenomenon of the low value of Korean shares was initially thought to be related to the threat of continuing war on the Korean Peninsula due to the absence of formal peace between North and South Korea. After three years of warfare, only a truce was reached in 1953, so the real war was not over. In addition, North Korea during the reign of Kim Jong-Il – the son of the country’s founder, Kim Il-Sung – has developed nuclear capabilities so that it is feared that conventional war could escalate into nuclear war.

The international community only realized that the threat of war was not a determining factor in depressing the share prices of South Korean companies, after Kim Jong-Il died at the end of 2011 and the stock price index did not increase. It has now been agreed that ‘Korea Discount’ tends to be rooted in low investor confidence in the implementation of good corporate governance (GCG) by conglomerates, which in Korean is called chaebol. In effect, among these chaebols – even though they were officially public companies – complete control over the corporation remained in the hands of the founding families. They use shareholder funds (public) to finance the operations of subsidiaries through ownership networks that are deliberately not transparent, or award contracts through improper procedures to family members, also known as ‘tunneling’.

The low GCG thus directly has an economic impact on the company concerned. About 80% of South Korea’s GDP is generated by chaebols, so the impact of this business group on the country’s economy as a whole is also very significant, including on the country’s stock exchange market capitalization because it results in a lower portfolio investment value. This is a clear example of the relationship between the implementation of GCG and the country’s economy as a whole.

What about the situation in Indonesia? So far, the market capitalization of Indonesian companies still shows fair value when compared to our neighboring countries. In conclusion, there is no “Indonesia Discount”. International investor confidence in the Indonesian business community is still high, even though there is no public company, most of whose shares are owned by the public, on the Indonesia Stock Exchange.

The percentage of shares of companies that are traded on our stock exchanges is generally only around 30% of the share value of each public company. The public or the public is essentially a minority shareholder in all publicly listed companies in Indonesia, whether established by state-owned enterprises or private companies.

Even though there is no ‘Indonesia Discount’, we still have to be careful and improve GCG, especially since Indonesia currently ranks fifth of the six largest economies in the ASEAN region in the implementation of GCG, one level above Vietnam. Based on the ASEAN Corporate Governance Scorecard for several periods, Singapore, Malaysia, the Philippines and Thailand have occupied positions above Indonesia. Not even one Indonesian company is included in the 50 best companies in implementing GCG.

The ASEAN Corporate Governance Scorecard was prepared by academics from ASEAN countries, including Indonesia, to fulfill the mandate of the ASEAN finance ministers given in 2009 to the ASEAN Capital Markets Forum (ACMF) to initiate efforts to integrate the capital markets of these countries. ASEAN as part of the 2015 ASEAN Economic Community. The five aspects examined are shareholder rights, fair treatment for shareholders, stakeholder involvement, disclosure and transparency, as well as the responsibilities of directors and commissioners.

Transparency and accountability are the main principles in GCG. Transparency does not mean sheer openness or ‘stripping oneself’ in all aspects of the company or giving people access to all information about the company, which is a passive approach.

Today, transparency is defined as a step towards active disclosure of a company (active disclosure) to convey information about its actions – both planned and unplanned – which have an impact on stakeholders. For this reason, the company must accurately carry out a stakeholder analysis and estimate what impact it will have on the various relevant stakeholders. By actively conveying information, a company also shows responsibility in terms of accountability for its business steps and decisions to its stakeholders.

As a closing note, the implementation of corporate social responsibility (CSR) must also be based on good governance, as required in ISO 26000 which has also been ratified by the Indonesian government. The six areas of CSR coverage, namely human rights, labor practices, environment, fair way of operating, consumer interests and community involvement/development, must be implemented on the basis of good organizational governance.

Not only for the business world, ISO 26000 also applies to all types of organizations, including government agencies, NGOs, and universities. Therefore, this reference does not only talk about CSR in particular, but social responsibility more broadly because its application is possible for all types of organizations. Organizational governance concerning the business world is good corporate governance. Companies that generally do not implement good corporate governance certainly do not have credibility in terms of CSR implementation.


Noke Kiroyan is currently Executive Chairman & Chief Consultant at Kiroyan Partners, member of the National Committee on Governance Policy.

Source: Bisnis Indonesia, November 11, 2015, page 2.

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