The Challenges of Corporate Governance in Indonesian Oil Palm: Opportunities to Move Beyond Legalism?

Abstract

Corporate governance plays an important role in shaping the behaviour of modern international businesses and has matured significantly since Friedman first advocated that corporate governance should solely be about serving shareholders. In the Indonesian business sector, belief in corporate governance, though growing, still has some way to go. This is particularly the case in the Indonesian oil palm industry, which currently finds itself in the international spotlight because of environmental and social concerns. Such attention reaffirms the need for sound corporate governance procedures to underpin a plantation's stakeholder relations because an oil palm plantation now needs to deal with a greater number of stakeholders than ever before. However, many Indonesian plantations have not yet embraced the potential for using a focus on corporate governance as a way to drive business improvements. This article argues that a judicious response to the increased attention on Indonesian plantations would be to implement plantation-wide business improvements based on improved corporate governance processes. It argues that plantations that fail to move beyond legal compliance (“beyond legalism”) in their relationship with local smallholders will continually need to grapple with the resulting tensions generated by the smallholders' endemic feelings of injustice towards the plantation companies' distribution of benefits.

Keywords:

• Indonesia
• corporate governance
• oil palm
• stakeholders
• business ethics

Acknowledgments

I acknowledge the impetus of Sheila Gowans, Lesley Potter, Emma Aisbett, Peter Verhezen and Josephine Masciantonio in the initial stages of this paper and the input of the anonymous referees. Any mistakes and opinions contained herein are the author's own.

Notes

1. An example of this is seen in a 2010 internet campaign focusing on the multinational corporation Nestlé’s sourcing of palm oil from Indonesian plantations. See, for example, http://edition.cnn.com/2010/WORLD/asiapcf/03/19/indonesia.rainforests.orangutan.nestle/index.html, accessed 1 March 2012. In this article, oil palm refers to the agricultural development of the crop and palm oil refers to the finished vegetable oil product.

2. The majority of Indonesian oil palm plantations have a smallholder component within the plantation arranged either through land division or a shareholding arrangement. In most Indonesian plantations, there is a company-owned inti plantation with a surrounding smallholder plasma plantation, whereby smallholders are “tied” to a plantation as they are obliged to sell their harvested oil palm fruit solely to the plantation mill. The inti-plasma arrangement comes in a variety of land division ratios.

3. The RSPO is an international multi-stakeholder effort to improve the social and environmental practices of the palm oil industry through third-party certification; www.rspo.org, accessed 12 January 2012.

4. ISPO legislation is covered in the Peraturan Menteri Pertanian No.19/ Permentan/OT.140/3/2011 tentang Pedoman Perkebunan Kelapa Sawit Berkelanujutan [Indonesia Ministry of Agriculture Decision No. 19/ Permentan/OT.140/3/2011 Concerning Indonesian Sustainable Palm Oil].

5. The RSPO has a series of principles and criteria that establish a definition of sustainable palm oil production. There is legitimate conjecture and doubt about the ability of premium payments given in international markets to create a groundswell of sustainably made products produced in developing countries. An excellent overview is Dauvergne and Lister (2010). I acknowledge that many plantation companies throughout Southeast Asia are not reliant on the RSPO guidelines to develop sustainable business processes, and that there is a growing question about the need for the RSPO in particular circles. See Gunasegaran (2011).

6. The advertisement is for the “Mamee Rice Sticks” product.

7. There has been discussion about the need for the development of uniquely “Asian” corporate governance values; see Li and Nair (2009) and Lattemann et al. (2009).

8. The debate over whether a business is responsible to its shareholders or the external stakeholders is a long one whose genesis is seen in Friedman (1970). Friedman believes that in a free economic system managers are entrusted with maximising business value. The key paradigm governing behaviour here is the legal framework and whether it is legally mandated for companies to act in an altruistic manner beyond the focus of generating shareholder value. In contrast to such a view, a useful analytical model for business-NGO stakeholder interactions is provided in van Huijstee and Glasbergen (2010).

9. Significant literature on corporate stakeholder management exists; see, for example, Freeman (1984), Bryson (2002), Donaldson and Preston (2006), Loza (2004), and Mitchell and Agle (1997).

10. This is changing due to newer partnership (kemitraan) arrangements and the “satu atap” approach to plantation management, where a plantation company will manage the entire plantation – plasma and inti – and provide a monthly payment to local landowners who have released their land to a plantation via a farmer cooperative. See Peraturan Menteri Pertanian Nomor 26 Tahun 2007 tentang Pedoman Perizinan Usaha Perkebunan (No. 26/Permentan/OT 140/2/2007) [Minister for Agriculture, Ministerial Regulation No. 26/2007 Concerning Guidance for Plantation Permission (Indonesia)], and Gillespie (2011).

11. For more on the role of culture in partnerships see Escobar (2001).

12. There are of course many Indonesian plantations that approach their CSR planning with a strategic long-term outlook. See for example Anif (2011), Supriyono (2011), Amri and Putri (2010), Ed (2011a) and Ed (2011b).

13. AMDAL is short for Analisis Mengenai Dampak Lingkungan, Environmental Impact Assessment; RPL is Rencana Pantau Lingkungan, Environmental Monitoring Plan; and RKL is Rencana Kelola Lingkungan, Environmental Management Plan. All are required as part of the licensing process.

14. The analysis of company websites for CSR information in this fashion implies that the authors assume that CSR website reporting can be taken as a proxy for the company’s broader CSR policies and practices. Although there is an argument that the terminology of CSR may not be consistent with or reflective of Indonesian companies’ efforts of gotong royong, working together as part of a community relationship, an examination of many Indonesian company websites demonstrates that gotong royong is often reported as part of a company’s CSR efforts. See, for example, http://www.vico.co.id/hse-policy-statement, accessed 5 March 2012, or the oil giant, Chevron in Indonesia, at: http://www.chevron.com/documents/pdf/indonesiafactsheet.pdf, accessed 3 March 2012. Further, the standard deviation of 0.1624 suggests that there is no one “Asian values” approach to CSR and that there is substantial variation in the penetration of CSR reporting within Asia. See Chambers et al. (2003, p. 10).

15. The analysis is not flawless; as the authors note, it is difficult to come up with a uniform unit of analysis with which to precisely specify the extent of CSR reporting. This is because of the range of website reporting styles and the fact that while some of the reports were in the context of general company communications, others were in dedicated reports (Chambers et al., 2003, pp. 10–11).

16. A Spearman non-parametric correlation reveals no statistically significant relationship in terms of the results. In other words, there is no statistical relationship between the level of penetration of CSR within a country and the actual extent of CSR reporting within the companies of the respective countries.

17. See Brosious (1999) for more on environmental narratives.

18. See Krisnamurthi (2007).

19. A Presidential Instruction specifically encourages the development of alternative fuel sources; see Presidential Instruction of the Republic of Indonesia No. 1/2006 Concerning the Use and Supply of Biofuel as Another Fuel Source. For an overview of biofuels in developing countries, see Peters and Thielmaan (2008).

20. The 70 per cent smallholder land ratio division in a plantation is perceived as a business risk regarding mill capacity and poor fruit quality. As one estate manager explained, “if the plasma cannot give a guaranteed Fresh Fruit Bunches (FFB) to the company mill, then the mill is idle. So companies need a high inti plantation to offset this and guarantee that the FFB will be sufficient for the mill capacity” (Discussion with plantation estate manager, March 2009).

21. KKPA schemes were introduced by national legislation; see the joint Ministry of Agriculture and Ministry of Cooperatives and Small Business Guidance No. 73/Kpts/KB.510/2/1998 and No. 01/SKB/M/11/98 [Menteri Pertanian dan Menteri Koperasi dan Pembinaan Pengusaha Kecil No. 73/Kpts/KB.510/2/1998 dan No. 01/SKB/M/11/98]. KKPA is a system of funding provided by the government in the form of credit that is loaned to a farmers’ cooperative that operates on behalf of its members.

22. The KKPA schemes enable the company to manage the previous inti and plasma land in one large plantation, and monthly income dividends are delivered to local farmers after operating costs and credit payments are deducted.

23. An increasing number of KKPA plantations are now managed in this fashion.

24. Discussion with district government economic advisor, June 2008.

25. See Sirait (2009), Gillespie (2011) and Pardamean (2010). List based on discussions with smallholders, plantations and NGOs across Indonesia and secondary research.

26. Details of company withheld, with author.