Is Reforming the Corporate Governance System Necessary?

JOHN E. H. J. FOEH1, DIAH AYU PERMATASARI2, JHONNI SINAGA3,

ADLER HAYMANS MANURUNG4

Faculty of Economic and Business,

University of Bhayangkara Jakarta Raya,

Jl. Harsono RM No.67, RT.7/RW.4, Ragunan, Pasar Minggu, South Jakarta City, Jakarta 12550,

INDONESIA

Abstract: - Due to lax corporate governance practices over the past few decades, fraud has both increased in

severity and frequency. The goal of this research is to improve current governance systems to help businesses

deal with issues in the global corporate environment. For a public company to succeed, it needs a solid

corporate governance system. It is critical to establish appropriate transparency guidelines and procedures.

Reforms are required to address existing issues and improve global corporate governance in the following

ways: a. The audit committee must monitor and enforce financial and disciplinary matters; b. The board

structure must be balanced; c. Continuous disclosure must be prioritized; d. CFOs and CEOs must be held

explicitly accountable for their actions; e. The selective mechanism must be completed; and f. The auditor's role

must be changed from that of a watchdog to that of a whistleblower.

Key-Words: - corporate governance, disclosure, transparency, audit committee, board of directors, auditor

Received: March 15, 2022. Revised: November 13, 2022. Accepted: December 7, 2022. Published: January 25, 2022.

1 Introduction

The corporate world now has converged core

values, company ambition, strategic means, and

manners, as well as stronger and more clearly

defined relationships between employers and

employees, meaningful communication between

coworkers and colleagues, commitment to

development and growth, etc. All of the essential

components listed above, as well as a few others,

must be present for a good corporate environment to

function smoothly. Additionally, an effective

methodology must be developed for the

environment to get the most out of its operation. The

objective must go beyond simply turning a profit,

[1]. For the corporate world to have a greater

influence on its economy, it must be socially

conscious, morally upright, and legally appropriate.

As a result, the need for and relevance of corporate

governance are greater today than ever before. In the

global corporate sphere, we need a good and

actively conscience governing system, one that not

only fixes the problems that have arisen as a result

of poor governance but also lays out the path of

honest dealings and sets an example for the future of

the corporate world, [1].

A dependable corporate governance system is

required for the success of public corporations.

"Corporate Governance" can be defined as the rules,

regulations, and guidelines that govern the various

units and their separate compartments that comprise

an institution that forms decisions influencing and

affecting the entire environment of the company,

with each unit being authentic in its functionality,

[2].

Corporate governance primarily consists of (a)

contracts which are of either explicit or implicit

types between the organizations and the

stakeholders for the dispersal of 3R which is

Responsibilities, Rights, and Rewards (b) Measures

to reduce the conflicts of interests between different

stakeholders. (c) Procedures for appropriate and

suitable control and supervision which is essential

for the system of check & balance. It is a much-

talked-about topic in today's business and financial

worlds and almost all of the world's major

economies are attempting to define and implement

sound corporate governance principles, [3].

2 Need for Corporate Governance

During the last few decades, the level and frequency

of fraud increases rapidly and the failure of many

governance policies started due to the same.

Therefore, to protect and govern any organization

properly, a good corporate governance policy is

highly needed. Some other reasons for bringing the

corporate governance are:

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John E. H. J. Foeh, Diah Ayu Permatasari,

Jhonni Sinaga, Adler Haymans Manurung

E-ISSN: 2224-2678

Volume 22, 2023

a. To protect the shareholder’s rights, corporate

governance is required.

b. To lower the influence of high-profile investors

on the company’s decisions, corporate

governance is required.

c. Corporate Governance is equally necessary for

building Public Confidence and it is equally

necessary for revitalizing the poise of investors.

d. Help the company to attract a hefty amount of

capital [3].

The key principles that form the basis of rules

and regulations for the corporate are listed below:

a. Accountability

It means a person is liable for all the decisions

he or she takes for the interest or the benefit of

the company. For example, A Chairman, CFO,

or manager is accountable to the stakeholders or

the shareholders of any company.

b. Independence

Becoming independent is very much necessary

everywhere. Top-level officeholders or the

board of directors, CFO, CMD have to take

independent decisions for the proper

functioning of any company. If the decision of

Senior officers gets impacted, then it would lead

to the downfall of any company.

c. Transparency

Disclosure of all the information except secret

one is vital for proper development as this

stakeholder of any organization knows about

day-to-day activities, [4].

2.1 Corporate Governance in Eastern and

Western Countries

Corporate governance systems and practices are not

implemented in all countries in the same way.

Distinct countries have created different structures

and ways of governing their businesses based on the

appropriateness of their social culture, market

environment, government policy, capital and money

market systems, and other considerations. Several

countries have developed corporate governance

principles and rules, each with its particular set of

institutions and conditions. Stock exchanges,

enterprises, and management issued these codes

with the backing of the governments and global

institutions. In most circumstances, the application

of these government regulations is not a compulsion

made by law, while rules connected to public

disclosure standards may have a persuasive impact,

[5].

As methods of enhancing and upgrading

corporate governance, certain European countries,

such as Germany, Austria, and the Netherlands,

mandate a dualistic board of directors. The

Executive Board, which is nearly composed of non-

executive directors who represent shareowners and

working staff, oversees day-to-day operations. On

the other hand, the Supervisory Board hires and

fires executive board members, ascertains their pay,

and establishes major commercial judgments.

The Securities and Exchange Board of India

Committee on Corporate Governance defines it as

"management's acknowledgement of shareholders'

inalienable rights as genuine owners of the firm and

of their own duty as trustees in the name of the

shareholders." The "Anglo-American model" of the

same places high value on shareholder interests. It is

governed by a solitary Board of Directors, which is

often controlled by non-executive directors who are

elected by shareholders. In the United Kingdom, the

CEO does not usually simultaneously serve as

Chairman of the Board, although in the US, the dual

job has long been the norm, despite serious

concerns about the impact on corporate governance.

Corporations are managed directly by state laws in

the United States, [6]. The corporate system and

structure of the United Kingdom and the United

States are characterized by diffused ownership and

ownership stake, with a substantial percentage of

shares subscribed by the general public. The capital

markets in developed countries are robust, with

substantial shareholder engagement. Corporate

enterprises must adhere to severe disclosure

guidelines to safeguard investors. In these countries,

the cornerstone of effective governance is the "code

of best practices." The Japanese and German

models, on the other hand, are somewhat distinct,

even though Asian countries are not converging

toward identical governance systems. The centrality

of particular ideas is a point of agreement among

reform proponents in each country, [7].

2.2 Recent Developments in Corporate

Governance Norms

The Corporate Governance framework aims to

safeguard the engrossment of the minor

stakeholders' say in the organization. It makes the

board accountable to corporates and the members.

Its importance is increasingly recognized in the

corporate world as it promotes transparency,

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John E. H. J. Foeh, Diah Ayu Permatasari,

Jhonni Sinaga, Adler Haymans Manurung

E-ISSN: 2224-2678

Volume 22, 2023

accountability, and trust to enhance investment,

stability, and growth through value creation. It is

also a leading pioneer in building affluence, job

creation, and a supportable and maintainable

commercial atmosphere, [8].

a. Greater attention toward director independence

Independent directors act as coaches and

mentors in the company rather than puppets

suffering in the hands of the founders of the

company. They enhance the competence of the

board by ensuring objective decisions which are

financially feasible for the company. They

secure a right to question the board in all the

decisions. They assist in enhancing

trustworthiness and regimen degrees by

working and helping in managing risk.

b. Board Evaluations

Board Evaluations play a key role in ensuring a

good understanding of directors' duties and

protecting the rights and interests of the

community and shareholders. It will certainly

help the manager or the executive to abide by

incorruptibility, so as to promote the interest of

the stakeholders. It also examines the role of the

board, and its responsibilities and assesses how

the Board fulfils its obligations. The Higgs

report of 2003, was one of the board evaluation

reports which highlighted the sheer importance

of position duty and effectual operation of

independent directors in the U.K., [9].

c. Information Technology Governance

The growth in the number of the companies has

become enormous and so it's dependence on the

online cloud platforms. Technology

advancement has created both opportunity and

risk. Most companies are engaged in data

management using AI and cloud-based

technology to safeguard the data. The

evaluation of tenders has also become online.

d. Shareholders activism

Shareholder activism consists of shareholders

voting rights, discussions, communications, and

behavioral influences. Acts as a very strong

mechanism as the shareholders can influence

the company by exercising their rights. They

can exert their rights and powers on par with the

owners of the company. Through this, they have

the ability to act as a powerful catalyst by

creating value for corporate growth. They can

bring the desired rotation in the functioning of

the companies and influence the management

on the governance mechanism.

e. Revival of activists and increased capital market

activity: As pointed out in the global

inclination, shareholder activists are expected to

carry forward the revival in 2021 as the world

commences to view the post-pandemic future.

f. Further focus on Environmental, Social, and

Governance: Apart from a global focus on

responsible corporate governance, ecologically

sustainable and civic issues seem to be the top

priorities for investors, evolving from a local or

national focus to a major worldwide

phenomenon. In most cases, both the board and

management are in the procedure of exchanging

views on the best ways to explain, integrate, and

monitor E & S issues that are important to the

business and its profit maximization. In addition

to this, the cultural and the ground socio-

economic data and analysis play a very

important role in overseeing the board.

2.3 What are the Current Problems with

Corporate Governance?

Corporate governance is challenging, and it only

gets more complicated as the world constantly

changes at a faster pace. Many multinational

corporations wield enormous power in business

without adequate accountability or oversight

from their boards of directors, [10]. The duties

of directors, the construction and stability of the

board, director remuneration and reward, the

lucidity of budgetary detailing and outsider

auditors, the Board's culpability for threat’ and

insider control, Shareholders' Rights and

Responsibilities, and Collective Civic Authority

and Business Morality are among the major

issues discussed around the world, [11].

a. Mistrust Environment

In recent years, deceit, deception, treachery, and

embezzlement of public funds have taken place

as a result of the corrupt undertakings of the

executives and the board members. This has

shackled the trust of the existing and potential

capitalists in the credibility of sound practices

of the companies.

b. Transparency and Data Protection

What information has to be disclosed and what

hasn't been provided under the code of

transparency in corporate governance? And in

today's cutthroat competitive world, it will be a

hazard if the wrong information will be

disclosed. Data Protection and Digitization

privacy are central governance issues. The

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John E. H. J. Foeh, Diah Ayu Permatasari,

Jhonni Sinaga, Adler Haymans Manurung

E-ISSN: 2224-2678

Volume 22, 2023

board must ensure the protection of data from

misuse.

c. Founder’s Dominance in the Board

There do not exist detached identities of

businesses. Hence, the founders and the

promoters of the company continuously

influence the business decisions. These

promoters influence the board and the

management. This is because they own a

significant portion of the company’s share.

d. Removal of Independent Directors

The Independent directors can be easily

removed by the majority shareholders and the

promoters under law. This happens when they

didn't agree with the decisions of the promoter.

To save their position they have to work

according to the fancies of the promoters.

e. Selection Procedure

The Law requires a healthy mix of executive,

non-executive, and independent directors along

with women directors. This provision is only

complied with on paperwork as in the real

world, the appointments are still by way of

word of mouth or fellow board member

recommendations. Thus, we can see the

appointment of family members on the board.

f. Business Structure and Internal Conflicts

Business structures that require huge layers of

management also pose a significant challenge to

corporate governance. It thus poses a certain

hindrance to the company leaders to receive

accurate information from lower levels and to

command orders from them as the information

may get distorted at any point of the chain.

g. Term of the Board Members

The life-term members can pose many problems

to businesses say fixed beliefs, power gaining,

etc so the appointment of members for a long

term should be avoided. And the short-term

members will not be able to take extensive

injunction because of their efficiency as they

will be changed or removed from their posts.

3 Reforms are Required to Address

The Current Problems

When organizations are small, inadequate

governance may be overlooked, but when huge

sums and a big number of people are involved,

problems are more difficult to dismiss. Corporate

Governance Reforms can be elaborated as an

intentional interference in a country’s corporate

governance. They are scrutinized and applied

through the notification of a well-drafted and well-

tabulated set of corporate governance standards or

modification to countries’ corporate and securities

laws regarding the position and formation of all the

stakeholders, including the division of privileges

and competencies between management,

shareholders, and other stakeholders; the role of

media in information dispersion; and the protection

of whistle-blowers and penalty enhancement of

corporate fraud, [12].

Reforms are required to address existing issues

and improve corporate governance globally in the

following ways:

a. Financial issues should be monitored, and

financial discipline should be enforced by audit

committees

The Audit Committee for Corporate

Governance must (a) investigate any activity

that falls within its terms of reference, (b) obtain

data and details through workers, (c) seek valid

lawful guidance, and (d) secure the presence of

any new incomer with necessary proficiency.

b. The board structure should be balanced

The designation and resignation of self-

dependent directors are currently done by

majority vote. As a result, independent directors

are appointed at the request of the controlling

shareholders and must operate by the majority's

wishes. As a result, these directors are unable to

communicate their ideas independently and

honestly, limiting their effectiveness and

defeating the objective of appointing

independent directors.

c. Priority is given to persistent disclosures

Currently, transactions are disclosed to stock

exchanges periodically. The effectiveness of the

disclosure is hampered by the fact that the

information is available to investors much later

than when the transactions were completed.

Investors, the public, and regulators would be

able to better scrutinize transactions if they were

disclosed more frequently, increasing

transparency and data protection, [13].

d. CFOs and CEOs must be made explicitly

accountable for their actions.

The owners of the corporation bear a fiduciary

responsibility towards the minor shareowners

and the corporation. There have been instances

where controlling shareholders have used the

firm for their gain at the expense of the

company's and its shareholders' overall interests,

[14]. Leading owners should be given defined

fiduciary responsibilities and the possibility of

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John E. H. J. Foeh, Diah Ayu Permatasari,

Jhonni Sinaga, Adler Haymans Manurung

E-ISSN: 2224-2678

Volume 22, 2023

requiring a relationship agreement between the

organization and the majority stakeholders

stating their duties and responsibilities.

e. Refinement of the Selective mechanism

The designation given and resignation taken of

the self-dependent directors are currently done

by majority vote. As a result, independent

directors are appointed at the request of the

controlling shareholders and must operate by the

majority's wishes. These directors are then

unable to communicate their ideas

independently and honestly, limiting their

effectiveness and defeating the objective of

appointing independent directors, [15].

f. The role of auditors needs to be changed from

watchdog to that of whistle-blowers

Whistle-blower policy is becoming an important

aspect of corporate governance. If organizations

are successful in developing a strong

whistleblowing framework, it will help discover

any wrongdoing and deter employees from

engaging in unethical behaviour, [16].

The current law exclusively protects whistle-

blowers who disclose corruption, fraud, and

irregularities in the government sector.

In addition, regulators and concerned

Authorities must take logical and fair-minded

actions to put in place an effective whistle-blower

policy that protects whistle blowers’ identities and

prevents them from being victimized or harassed,

[17]. Companies must also hold complainants liable

if they file a fraudulent claim.

4 Conclusion

After years of research and policy advocacy,

corporations appear to be taking things more

seriously, with public company boards becoming

more diverse, significant investors becoming more

involved, and directors being more accountable than

before.

The modern corporate model is founded on a

system of honesty, trust, integrity, openness,

responsibility, accountability, and confidence, and it

assumes that shareholders entrust directors to use the

company's assets for the company's long-term

sustainability and shareholder value. The matter of

revelation, lucidity, unit consideration, the role of

directors, and the degree of answerability towards

the shareholders, and the general public need to be

revisited. Corporate governance is defined as the

promotion and maintenance of integrity,

transparency, and accountability at the highest levels

of management. It is not only a requirement for

surviving in competitive fieldwork for long-term

growth in the rising global market environment, but

it also embodies the values of justice, responsibility,

disclosures, and transparency to maximize value.

The degree or the extent of corporate

governance should be lofty so that the company or

the organization looks stronger in the eyes of

shareholders or the stakeholders and also among the

general public. But to ensure that degree we need to

have proper sets of rules and their implications in a

better manner. Although we have several strict rules

still fraud and other scams are going on repeatedly

in a much faster way. Therefore, preventing such

acts, it is required to have good corporate

governance and better transparency policies.

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John E. H. J. Foeh, Diah Ayu Permatasari,

Jhonni Sinaga, Adler Haymans Manurung

E-ISSN: 2224-2678

Volume 22, 2023

[8] Du Plessis, J. J., Harris, J. and Hargovan, A.,

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[16] Roe, M. J., Political Determinants of

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Contribution of Individual Authors to the

Creation of a Scientific Article (Ghostwriting

Policy)

-John E. H. J. FOEH, Diah Ayu Permatasari

carried out the introduction and problem

formulation of Section 1 and 2.

-Adler Haymans Manurung responsible for the

problem solution of Section 3.

-Jhonni Sinaga has organized and executed the

conclusion and revision.

Sources of Funding for Research Presented

in a Scientific Article or Scientific Article

Itself

This research received no external funding.

Creative Commons Attribution License 4.0

(Attribution 4.0 International, CC BY 4.0)

This article is published under the terms of the

Creative Commons Attribution License 4.0

https://creativecommons.org/licenses/by/4.0/deed.en

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DOI: 10.37394/23202.2023.22.1

John E. H. J. Foeh, Diah Ayu Permatasari,

Jhonni Sinaga, Adler Haymans Manurung

E-ISSN: 2224-2678

Volume 22, 2023

Conflict of Interest

The authors have no conflicts of interest to declare

that are relevant to the content of this article.