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Sunday, 27 Aug 2017

What is Corporate Governance

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A. Agency Theory and corporate management
In modern economies, the management and control of companies is increasingly separated from the ownership. It is in line with the Agency Theory that pointing out the importance on separating day to day corporate management from the owners to the managers. The purpose of the separation system is to create efficiency and effectiveness by hiring professional agents in managing the company. It is happened where the CEOs of public companies have responsibility to act as agents for the owners. While the owners seek to gain information (by evaluation), develop incentive systems to ensure agent actions in the owner's interests. Agency theorists attempt to design the most cost effective information systems.

However there is a problem in this separation of corporate management and ownership as well. Managers may seek to maximize their own-self interest at the expense of shareholders. Furthermore this separation may lead to a lack of transparency in the use of funds in the company and in the proper balancing of the interests of, for instance, shareholders and managers and of controlling and minority shareholders.

B. Corporate Governance background
Companies increasingly depend on external capital (equity, loans) for the financing of their activities, investment and growth. It is therefore increasingly in their interest to assure external financiers of the proper and most efficient use of funds, and of the fact that the management acts in the best interest of the company. Such assurance is given by a system of corporate governance. A sound corporate governance system should provide effective protection for shareholders and creditors, so that they can assure themselves of getting a proper return on investment. It should therefore also help to create an environment conducive to the efficient and sustainable growth of the corporate sector. Corporate governance can therefore be defined as: a set of rules that define the relationship between shareholders, managers, creditors, the government, employees and other internal and external stakeholders in respect to their rights and responsibilities, or the system by which companies are directed and controlled . (taken from Cadbury Committee of United Kingdom) The objective of corporate governance is to create added value to the stakeholders .

International principles for corporate governance are emerging. These principles cover:

- the rights of shareholders, who should be timely and properly informed about the company, who should be able to participate in decisions concerning fundamental corporate changes, and who should share in the profits of the company;

- equitable treatment of shareholders, especially minority and foreign shareholders, with full disclosure of material information and prohibit abusive self dealing and insider trading;

- the role of stakeholders should be recognized as established by law and active co-operation between corporations and stakeholders in creating wealth, jobs and financially sound enterprises;

- timely and accurate disclosure and transparency on all matters material to company performance, ownership and its stakeholders;

- the responsibilities of the board in the management, the supervision of the management and the accountability to the company and shareholders.

The government plays an important supporting role by issuing and enforcing adequate regulation on for instance company registration, disclosure of financial company data and rules on the responsibilities of commissioners and directors. The company however has the prime responsibility for implementing a system of good corporate governance within the company. The company should recognize the importance that a system of good corporate governance has for the interests of its shareholders, its financiers and its employees, and therefore, for the company itself. Companies should anticipate stronger enforcement of existing laws and regulations, the introduction of new regulations and increasingly strong public scrutiny over their actions.

C. The Benefits of Corporate Governance
By applying Corporate Governance to the companies, there are some benefits that could be gained. The benefits are as follows: 
1. Easier to raise capital; 
2. Lower cost of capital;
3. Improved business performance and improved economic performance;
4. Good impact on share price. (Due to the current Indonesian situation, privatization of State-Owned Enterprises can contribute significantly to the state budget)

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Forum for Corporate Governance in Indonesia (FCGI)
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