Why Indonesian Corporate Governance Failed - Conjectures Concerning Legal Culture

Abstract:     
This paper focuses on Indonesian corporate governance in the light of the Asian financial crisis of 1997-1999. Much of the blame for Indonesia's plight has been attributed to poor corporate governance. Unfortunately, the current corporate governance literature is unhelpful for the purpose of understanding what specific aspects of Indonesian corporate governance are to blame.

Accordingly, I undertake case studies of three Indonesian banks at critical junctures in their corporate lives during the 1990s. I find that, in each instance, key players acted in ways which cannot be explained fully by the corporate governance principles then in force. I postulate that the missing ingredient is "legal culture" as defined by Stanford University legal sociologist, Lawrence M. Friedman. Without the necessary legal culture to support major changes in the legal and institutional framework for corporate governance, many of the newly transplanted corporate governance concepts from overseas will simply not work in Indonesia.

I then draw three practical lessons based on the notion that legal culture plays an important role in the corporate governance phenomenon. Although these lessons are derived from the Indonesian experience, they may be relevant to other developing and transitional economies which are seeking to improve their corporate governance systems.

Accepted Paper Series