Corporate governance and corruption: A comparative study of Southeast Asia

Abstract

The weak corporate governance framework in Indonesia, as in other countries in Southeast Asia, was deemed a crucial factor in deepening the financial and economic crisis in the late 1990s. Over a decade after the 1997 Asian financial crisis, Indonesia and other Southeast Asian countries have made substantial governance reforms. The reform measures of the institutional framework, both in the public and corporate sectors, were intended to transform Indonesia into a clean, transparent, and accountable country. While the reforms have resulted in increased political stability, improved government effectiveness, and a more conducive investment climate, corruption remains a major concern in Indonesia. This study aims to evaluate how corporate governance mechanisms can reduce the opportunities for corruption. By utilizing agency theory, we argue that a strong corporate governance institutional framework helps to reduce a country's level of corruption. We focus attention on three components of corporate governance mechanisms, i.e., shareholder rights, the quality of the board of directors (BoD), and appropriate accounting and auditing standards, including transparency standards. In an attempt to strengthen corporate governance standards and practices in Indonesia, we conducted a comparative study among Southeast Asian middle-income countries, i.e., Indonesia, Malaysia, and Thailand. We rely on accessible secondary data such as corporate governance codes, laws, and regulations. Our study concludes that the Indonesian corporate governance institutional framework is less stringent compared to Malaysia and Thailand. This condition provides a favorable environment for corruption to persist because the standards and practices are less demanding and the companies do not necessarily have to comply with the existing regulatory framework.