Good Corporate Governance

In Cadbury Committee, Corporate governance is "the system by which companies are directed and controlled". It effort to increase the company/ organization performance. It involves a set of relationships between a company's management, its board, its shareholders and other stakeholders; it deals with prevention or mitigation of the conflict of interests of stakeholders. Ways of mitigating or preventing these conflicts of interests include the processes, customs, policies, laws, and institutions which have impact on the way a company is controlled.

The goals of good corporate governance are:

1. To increase the value of company with increasing the principle of openness, accountability, responsibility and fairness in order to make the company has high competitiveness.

2. Encourage the management of the company in a professional, transparent and efficient, and empowering function and increase independence.

3. Encourage the company's management in making decisions and execute actions based on high moral values ??and compliance with laws and regulations in force, as well as awareness of the company's social responsibility towards stakeholders and environmental sustainability around the agency.

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4. Increase the contribution of the company in the national economy.

5. Increase the value of investment and wealth of the company

Principles of good corporate governance:

1. Transparency

Disclosure of information is important, so that all interested parties know exactly what has and can happen.

2. Fairness

A good GC requires the protection for minority rights. Equal treatment and fair to all shareholders, prohibiting insider trading fraud, etc.

Komite Nasional bagi Pengelolaan Perusahaan yang Baik (KNPPB) requires at least 20% of directors are from outside that there is no relationship with shareholders and directors.

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3. Accountability

There is effective supervision based on the balance of power between shareholders, directors, and directors. There is accountability of commissioners and directors, and no protection for employees' career. Need to set meeting times within a certain time, and various other control systems.

4. Responsibility

It should be ensured corporate compliance to rules and laws that apply. For example in the PT open to the company secretary.

Anything else to add the principle of discipline, independency, and social-awareness, check and balance, and social involvement.

5. Work Ethic

GC more set of commissioners and directors, but the principles should be promoted to GC work ethic of the company. Required the application of the principles of GC in the behavior of corporate employees.

In the discussion of corporate governance is often found the term one-tier system and two-tier system.

A. One-tier system

One-tier system are widely used in the United State, United Kingdom Canada and Australia.

In one-tier system, the role of the board of commissioners (supervisors) and the role of the board of directors (executive / executive) made in a single container. The container is called a board of directors (BOD). This unification makes unclear the role of watchdog and enforcer.

In the one-tier corporate governance system, there are four types of board structure:

1. All executive directors are members of the board. Top managers are also members of the board. These are found in small companies, family companies and start-up business.

2. The majority of members of the board is the executive director. In this structure there is a non-executive directors in the board but the number was small (minority)

3. The majority is a non-executive director. Most of the non-executive directors are independent directors.

4. All non-executive director is a member of the board. Many are found in non-profit organizations. This structure is almost similar to the structure of the two-tier Europe.

B. Two-tier system

The two-tier system is widely used in mainland European countries such as Germany, the Netherlands. In the two-tier system, the role of commissioners and board of directors are clearly separated. Board of commissioners will oversee the board of directors.

For a two-tier corporate governance system, the existing structure is composed of two boards:

1. Supervisory board. It consists of a non-executive directors and independent non-executive directors are not independent (connected).

2. Implementing Council (executive board). It consists of all such executive director. CEO, CFO, COO, CIO (C-level management).

Indonesia adopts two-tier system of governance. This may be due to the influence of the Netherlands which also adheres to the system. But two-tier system puts European-style representative of the employee at the level of the board of directors. This is not emulated by the system in Indonesia. So, Indonesia use the Two tier syatem with modification. Suppose that can be replicated as well, perhaps the fate of employees in Indonesia can be a lot better.

Agency Conflict

In economic theory, the term agency conflict refers to the danger that individuals within an organization will act in such a way as to serve their own goals, and that these goals will come into conflict with those of the organization, such as a corporation, and its constituents, such as the shareholders. Extreme examples of self-interested behavior are criminal or civil fraud. But well short of fraud, some conflicts occur such as when managers within an organization let their concern over who will get the big corner office and related titles and perks affect their strategic or operational decisions.

Agency conflict is divided into two forms:

1. The agency conflict between shareholders and managers. The cause of the conflict between managers with shareholders including the decision-making related to fundraising activities (financing decision) and making decisions related to how the proceeds are invested

2. The agency conflict between shareholders and creditors.

Costs incurred by the firm to reduce agency problems (agency conflict) is known as agency costs, which includes monitoring expenditures, bonding and residual loss

Agency Costs

A type of internal cost that arises from, or must be paid to, an agent acting on behalf of a principal. Agency costs arise because of core problems such as conflicts of interest between shareholders and management. Shareholders wish for management to run the company in a way that increases shareholder value. But management may wish to grow the company in ways that maximize their personal power and wealth that may not be in the best interests of shareholders.

Some common examples of the principal-agent relationship include: management (agent) and shareholders (principal), or politicians (agent) and voters (principal).

Agency costs are inevitable within an organization whenever the principals are not completely in charge; the costs can usually be best spent on providing proper material incentives (such as performance bonuses and stock options) and moral incentives for agents to properly execute their duties, thereby aligning the interests of principals (owners) and agents.

Updated: May 20, 2021
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Good Corporate Governance. (2020, Jun 02). Retrieved from

Good Corporate Governance essay
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