SOCIALLY AND ECONOMICALLY PRUDENT?

SOCIALLY AND ECONOMICALLY PRUDENT? INTERACTION BETWEEN GOOD CORPORATE GOVERNANCE AND CORPORATE SOCIAL RESPONSIBILITY

Meuthia Ganie-Rochman, Siti Adiprigandari Adiwoso Natalia Soebagjo

Abstract More studies have been focusing on the relations between Corporate Governance and Corporate Social Responsibility. These studies are focusing on the characteristics of the company boards and their impacts on the CSR programs. We use three-pronged approach, namely to look at the relationships between corporate governance and corporate social responsibility, which are shaped by the company's institutional context. We aims at looking on how CGs structure and principles are implemented in the management of CSR through its principles, reflecting the companies respond toward the institutional context. The cases are three mining companies in Indonesia, a country with is already familiar with CG practices and yet political situations create much uncertainty to the companies. We find that companies’ relations with the government and community plays crucial factors on how CG is implemented. The more insecure the companies, the greater tendency to adopt two pronged approach: proceduralised management and establishing their social engagement agencies. Keywords: corporate governance, corporate social responsibility, dynamic capability, statebusiness relations, Indonesia Words : 9,419 Running text: Contextualised corporate governance and CSR

Introduction Corporate governance (CG) and corporate social responsibility (CSR) are currently the two most popular concepts in corporate life worldwide. Many practitioners believe in the virtues of both. For example, (good) corporate governance is seen as a vehicle for improving company performance and increasing accountability inside and outside the business organization (OECD, 2004). As for CSR, it is widely believed to be a vehicle for improving a company’s position in society, where growth and social acceptance go hand in hand (Waddock, 2003). In reality, CG and CSR have different logics as they have different goals, institutional set ups, and modes of social engagement with stakeholder groups (Birch, 2003; Roe, 2004). The search to close the gap between trajectories of concept and reality continues, both at the corporate level and in the community in which the company exists. Various international standards and guidelines, such as the Global Reporting Initiatives and ISO 26000 on Social Responsibility, are part of these trajectories. These standards try to seek allignment between corporate social responsibility practices within particular constructs of corporate governance.

More works have been focusing on the various forms of interactions between these two domains. Rao and Tilt article indicates that these works mainly focus on the attributes of board of directors and their impacts on CSR company activities (Rao & Tilt,2016). More studies are still needed to see how corporate governance – structures and principles – are used to manage company CSR activities as part of company strategy to dealing with social environment. Few studies look at the link between CG and CSR in this problem perspective, but two groups of author have created new pathways. The study by Jamali, Safieddine and Rabbath (2008) analyses the level of integration between CSR and CG. The study by Kang and Moon (2012) uses an approach that allows for macro-analysis by using the logic of complementarity. They want to see to what extent the how far CG and CSR are intermingled. Our research aspires to contribute further by how far

2

institutional environment are managed using CG structure and principles in CSR programs by taking cases in the Indonesian context.

The purpose of the study is to look at the relationships between corporate governance and corporate social responsibility, which are shaped by the company's institutional context, and, beyond simply make a categorisation, to look at the strategic meaning of such relationships for the company. This paper will adopt organizational institutionalism theories as the analytical tools used to analyze the interactions between the two domains in a country that is undergoing political transformation. Using Victor Nee’s framework, we hope to be able to identify the social processes that occur at various levels, as well as the response of companies as agents that use CG and CSR as instruments. For this research, we focus on extractive industries in Indonesia. Indonesia is a lower middle income country where mining industries, primarily coal, gold, and copper, contribute only around 10 percent of national GDP (Indonesian National Bureau of Statistics 2014) and around 85percent are controlled by foreign companies (Kompas.com, November 7, 2013) . Many of the big mining companies have existed since the era of the New Order, the former political regime that often used undemocratic methods to establish or protect companies. At that time, public protest about particular companies was mostly silenced rather than negotiated (GanieRochman, M., 2002). These incidents created invisible wounds that bred critical perceptions of mining companies. The political openness since then has created room for interest groups to criticize and put pressure on companies. This country’s context adds to the existing international pressure on mining industries regarding their environmental and social impacts (Rosser & Edwin 2010). Therefore, it is understandable that big mining companies consider it important to have ‘proper’ corporate governance structures and corporate social responsibility programs.

3

The paper is divided into four sections. Following the introduction, the second section will discuss relevant concepts and theories. The third section will look at some cases, and the final part will offer a conclusion with a theoretical reflection.

Theoretical Framework This paper uses the definition of CG proposed by Cadbury (2000, p.8) : “…the system by which companies are directed and controlled and how managers exert their functions through compliance with the existing laws and regulations and codes of conduct…” and that of MacMillan (2004, in Jamali et al. 2008): “CG encompasses the notions of compliance, accountability, and transparency”. We place the concept of CG in a neo-institutionalism approach. This approach gives meaning differently on corporate resources, corporate interaction in an organizational and institutional network, and corporate objectives. We argue that neo institutionalism approach have enriched the study of organizations, including business organizations, and the question of how the institutional environment shapes organizations (Scott, 2004).

With the broadening of perspective in looking at interactions within business organizations, our concept of governance also includes the management of relations with external stakeholders who are directly connected to entities existing within the business organizations, such as shareholders, managers, suppliers, banks and so on. The concept and framework of corporate governance has broadened to encompass the management of relationships between various societal groups considered to be the stakeholders of a company, such as communities, government, NGOs, and rating and standardization agencies. They are considered important elements in a company’s existence. MacMillan calls it (in Jamali, Safieddine and Rabbath, 2008) 'broad CG', which emphasizes the business entity’s responsibility towards different stakeholders. Corporate social responsibility (CSR) is one of the most important forms of corporate interaction with social groups. For companies, this new area also requires specific forms of governance. With increasing 4

pressure for corporations to adopt CG principles, it has become more important to know the extent to which corporate governance is developed in this social arena.

As for CSR, we adopt the widely accepted, broad understanding of CSR from the International Institute for Sustainable Development: “…the way corporation(s) integrate social, environmental and economic concerns into their values, culture, decision making, strategy and operations, and thereby establish better practices within the organization, create wealth and improve society.” (Hohnen, 2007). But this is the ideal CSR; not many organizations are able to implement this framework, although some endeavor to fulfil certain aspects of this scheme. CSR does not have definitive forms, companies all over the world adopt CSR programs in many ways and forms; their depends on the institutional contexts (see, Jamali, 2014) and field level pressures (Famiola and Adiwoso, 2016). CSR programs, are considered as companies’ streategies to respond to the social environment. Secondly, we adopt Campbell’s view (2006) that socially responsible corporate behavior is more likely to occur when firms belong to business associations and engage in institutionalized dialogue with stakeholders. Furthermore, new management practices, such as CSR, do not emerge and become institutionalized automatically in response to functional imperatives or environmental contingencies. They are contested, and involve struggle, conflict, negotiation, and the exercise of power.

As the recent ideal view on corporate governance has extended into wider social interactions, it may seem difficult to distinguish with the concept of CSR. The basic distinction is that corporate governance is about logic of interaction that enshrines particular principles, namely transparency and accountability. It is only now that companies are expected to be transparent and accountable to wider groups. That is why we notify varied forms of standards, tools and mechanisms to reach out various groups. Though, companies apply different levels and forms to different categories. For instance, procedures to interact with shareholders are much more distinct compared to its

5

communications with the public through its yearly sustainability report. On the other hand, CSR is about taking into account the social and environmental causes into the company existence. Company is expected to facilitate social welfare and environment sustainability. If we put corporate governance and CSR together, it will be “the way company facilitates social welfare and environment sustainability through transparent and accountable ways”.

We argue that there is research gap that fulfill understanding why company adopts particular mixture of corporate governance and CSR. We try to fulfill this gap by taking into account the institutional context where company operates. To understand the institutional context we use the framework introduced by Nee (2005), who develops the theoretical framework of neoinstitutionalism by differentiating the level of institutional environment and the scope in which actors react to the environment. In modern society, the state determines the broad norms such as property limits, labor conditions, interest rate stability, inclusion and exclusion patterns, the effectiveness of bureaucracy, and the use of resources by the state. However, we want to broaden the understanding of institutional environment, as significant phenomenon within a country's jurisdiction, to be the result of the orientation and capacity of the state to facilitate corporate governance and corporate social responsibility. On sectors, the institutional framework influences fields or organizations. These frameworks regulate the relationships between actors in one sector or among sectors, such as industry and the state. Legitimacy, status, influence, power, governance, organizational structures and the like often adjust to the institutional framework. It is at this level that neo-institutionalism has the stronger basis. But Nee does not view companies as passive entities: they seek ways to protect their interests. They do this in various ways, mainly in the form of collective efforts using associations or forums. Companies may also use instruments like standards, guidelines and procedures to achieve their goals and protect their interests.

6

Organisations always try to avoid unpleasant consequences from its organizational environment by among other adjust its structure (Aguilera, et. all (2018). Corporate governance is a company tools to control negative impact that might come from the environment. Institutionalists view that conforming to institutional norms, real or manipulative, is a way that a company construct to despise negative responses or build legitimacy. Now companies are expected to adopt CSR principles or programs. CSR poses its own risk to company if is not managed well, more so since societal groups can impose their interpretation and demands. On the contrary, CSR can be a company tool to gain societal acceptance. In short, company has to manage it as part to maintain its existence and it is very contextual.

Company that is aware about the possible impact of CSR will put high level leaders to command their CSR programs, or otherwise. It does not mean, however, that high leadership only accountable to limited circle in company. As we have explain, the current ideal of CG definition embraces principle of public accountability. We also categorize CSR programs into two: wide areas and narrow areas. Hereby, crosscutting CG, CSR, and CSR areas will give us eight possibilities as follows:

7

Table 1. Governance, Leadership, and Corporate Social Responsibility

Governance

Wide areas

Selected areas

High leadership, Limited means of accountability

High leadership, Limited means of accountability, wide CSR areas (1) High leadership, Wide means of accountability, wide CSR areas (3) Low leadership, Wide means of accountability, wide CSR areas

High leadership, Limited means of accountability, selected CSR areas (2) High leadership, Wide means of accountability, selected CSR areas (4) Low leadership, Wide means of accountability, selected CSR areas (6)

High leadership, Wide means of accountability Low leadership, Wide means of accountability

(5) Low leadership, Limited means of accountability

Low leadership, Limited means of accountability, wide areas

Low leadership, Limited means of accountability, selected CSR areas (8)

(7) Using a three-pronged theoretical construct – organizational institutionalism, corporate governance, and corporate social responsibility, we see the problem formulation as follows: How the social and institutional context shape the implementation of corporate governance on corporate social responsibility programs? What strategic consideration that makes company adopt particular mode of governance in their CSR programs?

Methodology We conducted interviews and secondary data analyses in three big mining industries operating in Indonesia in between 2013 and 2014. Our selection represents three types of companies: ANTAM, which represents a state owned company that has an advanced CSR program; Newmont, which represents a formerly foreign-owned company experienced in long negotiations with the locals; and Weda Bay, which represents a multinational company that has a huge stake in Indonesia. Mining companies fit with our inquiries because they are among the types of company that are most compelled to have good corporate governance. Mining companies are also among the most

8

critically scrutinized in terms of their impacts on communities and the environment. Thus, mining companies pay considerable attention to their CSR programs. In these three companies, we interviewed people who led CSR programs and the transformation of their CSR governance. We also made reviewed company documents and mass media reports about the companies. The company documents reviewed were, for the most part, so-called‘ sustainability reports’ and activity reports. We reviewed media reports to get information about the companies’ activities as well as the views of community groups and non-governmental organizations about the companies. In addition to this sources, we also made research on the internet to see more diversified sources of communication. In the case of Newmont, the literature review spanned the 1980s, when the censure of this company began. We take note of the fact that although the three companies operate in the same sector, their backgrounds differ. Newmont Indonesia has existed since the autocratic regime as a high-flying international mining company, which understandably needed to make a lot of “pacts” with the then government to expand its business. ANTAM is a state-owned company, which only after the fall of the dictatorship, ramped up its performance and began to comply with international standards. Weda Bay just recently entered the country and needs some time to “test the waters”; it is still seeking to build its CSR governance.

9

Institutional Context Indonesia has been driven to improve the country’s corporate governance since the financial crisis at the end of 1990s. Since then, under the supervision of the World Bank, the Indonesian government has conducted a series of activities that aimed at improving CG. These governmentled initiatives have been supported by groups of professionals longing to see Indonesian companies meet internationally recognized standards. In 2004, through the Coordinating Minister for Economic Affairs, the government authorized the establishment of a semi-government organization to promote corporate governance in Indonesia. In 2006,this organization, called Komite Nasional Kebijakan CorporateGovernance or KNKG (National Committee for Corporate Governance Policy),produced CG guidelines for state owned companies and publicly listed companies. This agency has the strong backing of practitioners and progressive government officials. Over the years, the KNKG has beenable to produce and improve CG standards in various sectors (Bahar and Hadeli, 2014).

Regarding CSR, there are two main regulations. The first is Regulation of the Minister for State Owned Enterprises Per-05/MBU/2007 concerning Partnership Programs with Small Industries and Community Development Programs. The second is Article 74 of Law 40/2007 concerning Limited Liability Companies. The first regulation requires SOEs to use a maximum 2 percent of net profits for community partnerships and programs. The second regulation stipulates that all companies operating in the utilization of natural resources should have social and environmental responsibility programs.

There is some confusion over Article 74 of Law 40/2007. On the one hand, it seems to establish a new umbrella regulation on CSR practices, but a phrase within the same article stipulates that CSR practices must follow sectoral regulations. In earlier regulations, the focus was more on a responsibility to maintain the well-being of the community and environment. There is also 10

confusion over the implementing regulations for Article 74, which states that that the individual company shall make its own decisions about CSR implementation. However, there are no clear guidelines about the amount of resources to be allocated. All in all, this article cannot be used to legally enforce a company to conduct CSR activities beyond those required by sectoral regulations.

The decentralization of authority has given more power to the district level and has boosted political activism at that level. In fact, Law 32/2004 on regional autonomy sets boundaries on how far local autonomy – for example to make regulations and grant licenses–can be implemented. But due to the national government’s weak political and institutional capacity, local governments often cross the boundaries of their authority. There are many local regulations that conflict with national laws and the Constitution.1 Even more problematic is the political process at the local level. Lack of control by national state and civil society organizations has allowed local governments and other local actors to interpret and implement regulations in their own interests (Ganie-Rochman and Rochman Achwan 2016). This situation has affected the way companies run their business and their CSR activities. They need to find ways to tame the demands of local actors. The situation becomes even more complicated if a company is subject to internal or foreign national regulations, as it may have to resort to engaging in illicit practices. Companies around the world have recognized the need to engage with local communities and instruments have been developed to handle their encounters with local issues. However, these instruments are insufficient to handle the intricacies of local institutions and politics, which can implicate companies and shape their choice of CSR activities in a negative way.

1

The most problematic local regulations are those concerning local levies. In 2012 alone, the Ministry of Home Affairs reviewed 3,000 potentially problematic local regulations and abolished 173 of them. Source: http://sorot.news.viva.co.id/news/read/381520-mendagri----semua-perda-keliru-bisa-dicabut-7 11

Article 74 of Law 40/2007in itself is not harmful to companies, but social and political processes have created detrimental environments for many companies. Local actors may insist that CSR is obligatory and demand that companies share their resources. These demands are often only a reflection of interests of particular actors, such as local politicians or self-proclaimed social leaders, who often mobilize masses to exert pressure. Or, which is the case in many places, local governments demand that companies hand over their CSR funds to them to manage, without clear accountability mechanisms.

Cases in the Indonesian Extractive Industry

PT Newmont Nusantara (PTNN)

PT Newmont Nusantara (PTNN) is a subsidiary of Newmont, a company based in Colorado, United States. Newmont produces gold and copper and operates in the US, New Zealand/Australia, Peru, Canada, Ghana, and Indonesia. Operations in Indonesia accounted for 14% of its assets in 2010.PTNNwas established in 1986 during the Soeharto administration, a period called “pre-reformasi.” Like other large companies in the Soeharto era, this company operated under conditions in which there were no transparency or accountability mechanisms established by the state, which exposed this company to criticism in the period of reform, a time of widespread criticism and politicization. From 2002, this resulted in years of conflict between NGOs, policy makers, politicians, and local governments. Accusations against PTNN had in fact already been made by environmental NGOs as early as 1995, but the changing political system gave many other parties the opportunity voice their criticism, eventually leading to litigation, the arrest of the PTNN president (an American citizen), and the US government intervening in the matter. In its defense, PTNN

presented several environmental studies conducted by

internationally recognized research institutions, and ultimately emerged from the episode 12

unscathed. However, what followed was a so-called "gesture of goodwill" by the company, in the form of USD30 million for local social and economic development over a period of ten years. This fiasco occurred in spite of various community development programs the company had implemented. This case is an example of the difficulty companies in Indonesia have counteracting criticism in the face of institutional weaknesses in national government authority, local politics, and law enforcement (Ganie-Rochman, 2008). After that long battle, PTNN seemed to shift the focus of its CSR program – and the corporate process as a whole – to environmental improvement, and the company has since received several environmental awards. In fact, PTNN believes it is important to develop programs that focus on several aspects of community development. Its CSR programs cover four main areas: education, health, environment and economic skills for local communities. Its environmental programs include initiatives to support local economic development, such as growing teak trees and bottling mineral water. Many of its social and economic programs are implemented by the Olat Perigi Foundation, a community organization that gets full financial and skills development support from the company.

PTNN does not produce its own CSR sustainability report; rather, it is included in the report produced by its headquarters which uses the Global Reporting Initiative (GRI) framework. PTNN management do not consider it necessary to produce a separate integrated GRI-based report, although the company does produce reports for each area of its CSR program. According to the company's president, there is no additional benefit to the readership from the company producing its own report; he is confident that the various awards that the company has received for its environment management and CSR programs are proof that the company is on the right track. As PTNN is partly owned by Newmont, the parent company's good corporate principles are considered to somehow brush off on to PTNN. The challenge for PTNN is to adopt this identity

13

in the Indonesian context. Understandably, the CSR focus is on the environment as well as programs that easily satisfy the local community. However, the CEO says that the challenge for the company is the creation of sustainable economic development after the mining ends. He argues that the current CSR program has not achieved this, and under his leadership, he wants to restructure the company's CSR program to achieve higher goals.

Indeed, PTNN's new organizational structure indicates that the CSR program will take a more central position in the company. There is now a General Manager for Social Responsibility, who oversees the whole program, and is one of three general managers who report directly to the company president. Under this general manager are three senior managers, one each in Jakarta (national government), Mataram (provincial government), and Sumbawa. The geographical placements of these senior managers reflects the hierarchy of issues that the company needs to deal with. This type of hierarchization seems to be a normal reaction to the politico-administrative realities in the Indonesian state. While during the period before the reforms, a company's dealings with the centralized national government constituted the most crucial relationship of all, since the regime change, local government has encroached on this relationship. To create ownership, PTNN engages local government and local leaders to discuss long-term economic development needs. However, the company still holds to the view that the main responsibility for local development lies with government, not with CSR programs. Ideally, CSR programs should be incorporated into the framework of local government development plans. Although it is unlikely that this level of commitment can be guaranteed, at least PTNN is beginning to raise awareness to the fact that the company will not exist indefinitely.

PT Aneka Tambang (Persero) Tbk (ANTAM)

ANTAM is a diversified vertically-integrated and export-oriented mining company. In 1968, several national mining companies were merged into the state owned enterprise that became 14

ANTAM. In 1997, most of the company’s shares were offered to the public and listed on the Indonesian Stock Exchange (IDX), and in 1999 ANTAM listed its shares on the Australian Stock Exchange (ASX) as a foreign exempt entity. To be a credible listed company internationally, ANTAM has to fulfil many internationally recognized standards, such as ISO 9001, REACH, and ISO 18001. This is an example of an international company adopting full-scale standardization in its corporate governance. The company adopts all recognized dimensions of good CG, including compensation and remuneration, conflicts of interest avoidance, prevention and management of risk, anti-corruption and fair business competition, and freedom of expression. Corporate governance is established through socialization and parameter development for management and staff with training materials covering, among others, code of conduct and business, compliance, insider trading, anti-bribery, whistle blowing and code of conduct, and conflict of interest. Company training in leadership and corporate values and good corporate governance (GCG) implementation also include material on human rights.

A GCG Champion In-Class Meeting was held three times in 2012, in April, May and June. This program is an approach adopted to create change agents within the company to ensure ANTAM’s good corporate governance is properly implemented at each level. The company also cooperated with the highly credible National Commission for Corruption Eradication to improve its procurement procedures and train 22 staff who are responsible for handling procurement in the company.

While many big companies, especially Indonesian state-owned enterprises, are still strugglingto implement good corporate governance, ANTAM aspires to achieve good corporate citizenship. Citizenship is demonstrated by engagement in the establishment of public norms, and as an SOE, ANTAM is understandably a source of information for the government. But this company also engages in an area that most other companies do not – in its effort to integrate the company's CSR

15

into local government development programs, it participates in the local development planning processes that are relevant to its area of operations.

Other steps taken by the company to further integrate CG and CSR include the following:

1. The company's CSR-LPT Committee is integrated into the GCG Committee, and ANTAM was the first SOE in Indonesia to have a director of CSR. The aim is to optimize the integration of CSR into the company as a whole. 2. The GCG Committee also undertakes all coordination, dissemination, facilitation, and advocacy related to the integration of all core aspects of CSR mainstreaming, which includes human rights, labor practices, fair operating practices, and consumer issues. The committee’s performance is presented to the board of directors in various reports. A master CSR plan is developed to enable the company to use its abilities to fulfil stakeholder wishes, which include respecting local community rights, acknowledging community interaction, and recognizing the value of partnership and social investment to the community. 3. ANTAM completed stakeholder mapping and engagement plans in 2011, which were carried out throughout 2012, and will continue to be implemented in the future, until such time the map and plans are revised. The mapping referred to the 2006 version of the AA1000 Stakeholder Engagement Standard. 4. Control and reward. Compensation and remuneration for employees from division heads down are determined by the board of directors, taking into account the achievement of key performance indicators (KPI) and the company’s overall performance. The KPI assessments for the CSR Division and Environment & Mine Closure Division in particular include the social and environmental aspects of CSR. With the aim of improving performance, ANTAM also uses a very similar customer satisfaction index for the beneficiaries of its CSR programs and its customers.

16

5. Responsible production. The company also encourages the Directorate of Operations and the Directorate of General Affairs and CSR to measure the performance of the entire program using a rigorous methodology to identify the level of efficiency and effectiveness of resource use. 6. Reporting as a form of transparency and accountability. The company uses the Global reporting Initiative (GRI) Sustainability Reporting Guidelines (SRG) version 3.1 (G3.1) and the Mining and Metal Sector Supplement (MMSS). In the past two years ANTAM's reports have consistently presented cross references between the GRI reporting standardsand ISO 26000:2010 Guidance on Social Responsibility, a comprehensive guidance for good organizational practices in society.

PT. Weda Bay Nickel

In 1996, state-owned PT Aneka Tambang and Strand Minerals Pte.Ltd. submitted an application for a preliminary survey license to the Ministry of Energy and Mineral Resources, for a contract of work area covering 120,500 hectares in Halmahera, a pristine island in North Maluku Province, where primary forest covers approximately 80% of its 3.1 million hectares. Weda Bay Nickel (WBN) is a locally incorporated limited liability company, which is 90% owned by Strand Minerals Pte. Ltd. The remaining 10% is held by PT Aneka Tambang, which is now listed on the Indonesian Stock Exchange and the Australian Stock Exchange.

In 1999 the Ministry of Forestry issued Law 41/1999 prohibiting open cast mining in protected forest. This affected the company, and in 2003,it decided to suspend exploration activities as a consequence of the new law. In 2004, however, the government issued Government Regulation in Lieu of Law 1/2004 which amended Law 41/1999. This government regulation was strengthened

17

with the enactment of Presidential Decree 41/2004.

The Presidential Decree allowed 13

companies, including Weda Bay Nickel, to operate in protected areas until the expiration of their licenses. Weda Bay’s contract area was, however, reduced to 54,874 ha.

Weda Bay Nickel operates in an institutional environment which is unstable and uncertain, as demonstrated by the regulatory changes that have taken place since exploration started and the concessions the company has been given. Given the nature of the industry and its impact on the environment and on local communities, mining companies are open to scrutiny, particularly when operating in areas which are rich in biodiversity such as Halmahera. The way they interact with the community and the way they implements their corporate social responsibilities will impact on the sustainability of mining companies. Weda Bay Nickel is a joint venture company which is not listed on the Indonesian Stock Exchange, although its main shareholders are public companies, which are bound by strict corporate governance rules.

Corporate Governance Practices Weda Bay Nickel’s majority shareholder is Eramet SA, a French multinational mining and metallurgy company founded in 1880. It is listed on the Euronext Paris Exchange, has operations in more than 20 countries, and employs 15,000 people. As a listed company, Eramet SA has to comply with the CG principles set by the Association Francaise des Enterprise Privee (AFEP) and the Mouvement des Entreprised de France (MEDEF).

The Erametgroup has a sustainable development policy covering health, safety and environmental issues, with an emphasis on social responsibility and transparency. Eramet also has several charters on the environment, safety and health, and an ethical charter or code of ethics, which was drawn up in 2010.

18

Even though no fixed investment decision has been made due to changes in the regulatory framework and delays in negotiations with the government, the company has invested heavily in pre-construction activities and in preparing local communities for the major project. The amount of money invested has increased to approximately US$500 million, and according to the general manager of external relations, the company has little choice but to continue to invest to ensure the success of the project. The company has identified three major challenges in their operation in North Maluku. 2These challenges are mostly socio-political in nature. In 2012, a representative from Eramet SA head office visited the Weda Bay Nickel site to better understand the context and to see how the ISO 26000 could be adapted to the local context. The Weda Bay project is unique in that no other location in which Eramet operates has a CSR program as extensive as the one in Weda Bay. Compared to Gabon or New Caledonia, Indonesia’s laws regulating the mining industry are also much more complex and stringent. It is also a project that attracts sharp criticism from NGOs, despite the corporation’s good intentions.3

Corporate social responsibility is understood by the management of Weda Bay Nickel to be ‘community development’. The company’s stated vision of community development is to nurture a sense of belonging of all stakeholders in order to ensure the sustainability of the project, with a mission to become a key contributor in the Papua-North Maluku Economic Corridor. Social responsibility, if understood to be community development, is therefore much more narrowly

The first is mitigatating the impactsof forest clearing and mining activities, as more than 98% of the work contract area is forestland. Second is protecting coral reef because the site is located in the Coral Triangle, which is internationally recognised for its rich marine biodiversity. Third is how to best resolve the issue of the nomadic, indigenous Tobelo forest dwellers, whose lifestyles and livelihoods are directly affected by the presence of the company. 2 In 2011, prior to the completion of the ESHIA, a coalition of NGOs submitted a complaint to the Office of Compliance Advisor/Ombudsman (CAO), an independent recourse mechanism for IFC and MIGA. 3 In 2011, prior to the completion of the ESHIA, a coalition of NGOs submitted a complaint to the Office of Compliance Advisor/Ombudsman (CAO), an independent recourse mechanism for IFC and MIGA. 2

19

defined than in the international standards which Eramet SA abides by. Decisions regarding the Weda Bay Nickel’s in Halmahera are, however, guided by these broader standards.

Although community development activities and local development support activities were begun in 2008, it was only in 2010 that the company decided to establish the Saloi Foundation specifically to implement the company’s community development programs, which are long-term and more conceptual. One-off charitable donations, which most Indonesians consider to be part of CSR, are managed at head office level. These ad-hoc contributions can be sizable as they often relate to infrastructure development, such as building roads, repairing bridges and renovating churches. In 2011, the Saloi Foundation established an advisory board with representatives from local government, local communities, academics, and from Upper Normandy, France, and from the Indonesian embassy in France. The purpose is to better understand the different cultures involved in the project.

Analyses

The institutional context and CSR

PTNN CSR programs that focus on the environment aim to achieve two goals: to mitigate production impacts and engage in risk-controlled interactions with the community. The company can justify its adoption of environmental issues under the strict and detailed international regulations and norms on mining industries. Indonesian government regulations on mining have also matured, and since the end of the New Order, environmental issues have been handled by a ministry. The problem lies in the institutional set up, which fails to ensure that the regulations are properly implemented. For instance, there is a lack of credible organizations to conduct feasibility studies; the bureaucracy is unable consistently regulate the actors in the mining industries (including illegal mining activities); and there is no integrated environmental control.

20

In addition, the local government in the area where PTNN operates is not a reliable partner in achieving the common goal of sustainable local development. The current political system has made local governance a highly contested arena. These actors contest for control of resources. One of the sectors most manipulated is mining (Corruption Eradication Commission report, 2014). The political elite exploit companies and are unscrupulous in their approval of licenses. As a consequence, PTNN finds it difficult to get the solid backing of local government when it needs it, despite the fact that the company contributes around 90 percent of West Nusa Tenggara province’s gross domestic product. Studies by Handoko & Widodo(2007) and Ganie-Rochman (2008) indicated that Newmont has even been politicized by national government. Although Newmont, with the backing of several international research institutions, was able to prove its innocence in the face of accusations of pollution, it still had to engage in a long and painful legal battle. Against that background, it is understandable that the company focuses its CSR activities on environment issues. But within the scope of environmental issues, its CSR is able to span many kinds of activities, from environmental activities, to social and educational activities, and even development of plantations. However, to minimize the risks, the company has built its engagement with local stakeholders carefully, emphasising transparency and managed commitment.

ANTAM is rare among Indonesian SOEs, in that it entered the global market soon after the political change. This meant having to comply with stricter mining regulations in the areas of internal governance, external accountability, and social responsibility. The company produced its first sustainability report in 2006. Development in international standards on corporate social responsibility have left ANTAM even more exposed to sensitive issues. That is the reason this company seems very progressive in its adoption of internationally recognized instruments in its CSR. Unlike PTNN, this company does not have history of significant conflict, and therefore has had more room to develop new forms of CSR management.

21

Because of ANTAM's status as a SOE mining company, unlike its foreign counterparts, it has clear politico-administrative relations with local government. There is also less room for politicization. Any conflicts have not been as complex or widespread as those experienced by Newmont and Freeport Indonesia (a subsidiary of Freeport MacMorran). Vested interest struggles over large SOEs generally involve national rather than local elites. Again, this gives ANTAM more room to develop programs for the local community.

Weda Bay is a European mining company that began operating in Indonesia only recently. It came with the fully-fledged European corporate governance standards and CSR guidelines. When it came to Indonesia, this company needed sometime to contextualize the guidelines to Indonesia. Unlike ANTAM, which also adopts international guidelines, Weda Bay did not have an established organizational basis to manage its social relations. It had to start from the beginning, recruiting people and building networks. Yet criticism from the locals persists, which understandably generated some frustration on the part of company, which felt it had adhered to the guidelines. In 2010, it established a local organization to manage its CSR programs; a step often taken by mining companies. The fact that in 2011 its supervisory board comprised local and foreign members demonstrates Weda Bay's attempts to manage local affairs from the start. The narrow translation of community development programs to mean largely infrastructure development, indicates that Weda Bay is not yet confident in its social interaction with the local people, as contributing to infrastructure development is always an easy way to impress local people and government.

22

The links between CG and CSR

Because of its history of conflict, PTNN focuses on environmental control across the whole production process. It may be seen as falling within the second category described by Jamali et al., i.e. (2008) that the structure of production and governance is shaped by its obligation to the 'triple bottom line' (people, planet, and profits). In the bigger context using our scheme, it falls within the second category (High leadership, Limited means of accountability, Selected CSR areas). PTNN is certainly concerned about being accepted by the international market as its CSR principles are also meant to create value. That is why it is very important that its production governance fulfils recognised standards. But what is more important for this company is to deal with pressures in Indonesia. PTNN can not afford to having another rumbling conflict on environmental issues. Every structure and mechanisms within this company are kept and used to averse all kind of risks, including those come from the society members. That is why its CSR programs are placed within auspices of the highest company authorities.

PTNN focuses on environmental-related CSR programs. In spite of narrow areas of CSR programs, this company also adopts a partnership approach to manage relations by establishing local organization and conducting various dialog activities with local government and community organizations. These mechanisms help develop commitments, responsibilities and roles between the company and other organizations. It means that the company also falls into Jamali's third category of CG and CSR as co-existing components of the same continuum: the company's past and current CSR programs have been within the safe area of limited community development. Although PTNN’s CSR programs are becoming more "schemed” and “framed”, as yet they do not come with detailed standard procedures. If the company goes ahead and implements a different approach to local development, with a post mining perspective, then it will enter unchartered waters and more procedures will be needed to address the intricacies of social relations.

23

ANTAM falls between the category 1 and category 3. It has high leadership, varied means of accountability, wide CSR areas. However, its means of accountability is highly proceduralized. As a mining company, ANTAM requires rigidity and a centralized mode of organizing, but the diversity of its mining explorations means the company is constantly exposed to land problems, in addition to the complexities of local politics and institutional weaknesses. As such, the company is understandably under pressure to adopt clear rules of engagement. In other words, this company needs a type of CSR program that can quickly mitigate local conflicts. While the company's production practices attempt to adopt CSR values, its CSR practices are proceduralised and yet has varied instruments for being transparent and engaging. ANTAM adopts several recognized standards and its CSR initiatives seem to run relatively smoothly. This is because ANTAM chooses "safe" CSR programs, such as a limited framework of community development. Even its loan program does not involve risky and complex interaction with the local community; it only requires good management and an understanding of small businesses. While its participation in the official local development planning process is an innovative approach, it does not necessarily mean the company has direct contact with diverse groups, as local planning meetings generally only involve the local elite. A preliminary assessment of the Weda Bay Nickel’s CSR suggests that the company falls within the category 1 as PTNN. As PTNN, this company is very cautious in developing CSR programs as part of taming social critics that may disturb production. This company seems aiming for Jamali’s understanding of strategic philanthropy in so far that it is attempting to achieve strategic business goals by promoting social welfare. The company implements the four types of CSR identified by Caroll (1991), which are economic, legal, ethical and discretionary. Ho’s model of CSR as a dimension of corporate governance more closely fits the approach adopted by Eramet SA and Weda Bay Nickel, as non-financial risks and considerations have to be considered as part of these companies’ overall governance. At the moment, the management of Weda Bay Nicke’s 24

CSR and community development programs is governed by various corporate governance and social responsibility standards adopted by its parent company in France that are relevant to the realities on site. The management of CSR, including the establishment of the local organization as the hub of activities, is closely supervised and directed by a handful of people within company.

Given the locality of the company, nature of the industry, and the external environment, and the fact that Weda Bay Nickel at that time has not yet made its final investment decision on extraction, the project is still at the preparatory stage. The timeframe, project scope and the investment value is substantial, and therefore the company needs to ensure the acceptance of the project in the community prior to increasing its investment. The effectiveness of its CSR programs is therefore key in ensuring the sustainability of the project. But if at the corporate level, CSR is understood as ‘community development’, the local communities’ understanding of CSR tends to be even more limited, namely job creation and charitable donations. Although GCG and CSR seem to complement and strengthen one other, there also seems to be a gap between what the company strives to achieve and how its efforts are perceived and understood by the local community, particularly the NGO community. Hence, for Eramet itself, the CSR activities conducted in Indonesia highlight the complexities of fulfilling the sustainable corporate social responsibility.

Conclusion With the advent of CSR, the idea of corporate governance has broadened to include multi stakeholders. Most commonly included are consumers, government agencies, local communities, and media. Various tools have been developed to improve communication with these stakeholders. Communication with these groups (most notably with local communities) is promoted as a result of the idea of participation that has developed in parallel with CSR. The current concept of corporate governance enshrines the idea of inclusivity and equality in decision making. The production of these tools of communication is an extension of the corporate 25

governance principles of prudence, traceability, and feasibility. Companies need tools to manage their interactions with various social groups, and it is because these tools are used to support their CSR programs that CSR is often seen as being aligned with corporate governance. But it is not that simple. The concepts of corporate governance and corporate social responsibility not only have different philosophies, they are also shaped by different social processes. While corporate governance aims to maximize profit and is based on the principle of economic prudence, the concept of CSR was originally about addressing social causes to improve social welfare. But the question is not one of the extent to which a company should allocate resources for returns that are beyond economic calculation, nor one of whether CSR should be voluntary. These are misleading issues. CSR, like other corporate matters, is an element of the relations between these business entities and the rest of society. Other groups, most notably government, keep reconstructing ideas about the responsibility of companies. Companies have inevitably come under pressure to take some responsibility for social issues but in ways that can be translated into monetary terms, for example through taxes, penalties, and levies. Some issues that were previously considered areas for CSR, such as minimizing environmental damage to protect local communities, have since become legal requirements. However, the embedding of certain social issues in law in some countries has been ill-conceived or compromised by vested interests, thereby creating a negative environment for companies and, sometimes, society at large. Companies always require certainty, so it is little wonder they need tools that can manage their encounters with social realities. But, in the face of complex social realities, these tools are only a small part of what companies need. The principle on which CSR tools are based – along with the principles of good corporate governance – forbid companies from engaging in grey areas. On the ground, companies have to deal with social hierarchies, local vested interests, patterns of communication and the orientation (as well as the capacity) of local organizations; and these are

26

just a few of the many facets of these social intricacies. These are complexities that, even in the hands of the most enthusiastic of CSR practitioners, these tools are not equipped to deal with. In Indonesia, national regulations on environmental protection, and the CG and CSR responsibilities of companies have created a strong institutional context in which large companies in Indonesia must operate. All companies in Indonesia are subject to Article 74 of Law 40/2007 on the social and environmental responsibilities of companies. Its interpretation of responsibility differs from the internationally accepted understanding of CSR, which emphasizes its voluntary nature. What is more, this article, which requires companies to fulfil various environmental and social obligations, conflicts with several previously established laws and regulations, creating duplication and confusion. These obligations may appear innocuous, but the way the institutional context works is more complex than suggested by many studies that adopt the neo-institutionalism perspective.

The case studies above show that even formally formulated norms (regulations) are subject to different interpretation by the various stakeholders. In the Indonesian context, this is the result of the weakness of state institutions in implementing regulations, weak political systems, and the absence of a framework establishing who is responsible for what in local development. For Indonesian mining companies, the types of pressure faced are often too complex to be addressed by business logic. Article 74 is often stretched too far by groups claiming to be the companies’ stakeholders, in particular by community groups and local governments, who demand that companies provide the local community many things, such as infrastructure, jobs, public amenities, and even luxury goods. Local politics do not make it easy for companies to develop CSR programs, which require collective commitment and responsibility, and a prudent assessment of what the community actually needs. Unsupervised by national government, local governments interpret CSR in their own interests as an additional source of income. In Indonesia, local

27

governments generally lack the capacity to create sustainable local development (Partnership Index 2013)4. Instead, they demand that companies meet local needs, and sometimes even turn a blind eye to the local people’s unreasonable demands. In other words, local government cannot provide a tenable CSR framework for big mining companies.

That is why it is important for the company to equip itself properly in the face of such an unpredictable environment. This is not just about a company as an organization creating mechanisms to address its environment, but also about its internal readiness to control external impacts on the organization. As business organizations have been put under pressure by the institutional environment (from national states to global markets) to adopt good corporate governance schemes, corporate governance is the dominant factor in the interaction between CG and CSR. Transparency and accountability are two of the principles shared by GCG and CSR procedures and standards. However, in spite of the emphasis placed on consultation as an indication of a good company (albeit nothing more than dialogue between "us" (the company) and “them” (the stakeholders), the underlying logic is to treat these stakeholders as homogenous. What is missing is sensitivity to the social mechanisms that create the hierarchy of these categories of stakeholder.

CSR values are in fact different to those of CG. Values in CSR are people empowerment and societal solidarity. CG values relate to economically prudent acts. These CG values both create a tug of war with CSR goals. Companies need certainty and adopt risk aversion measures The

4

A 2011 report by the Regional Autonomy Monitoring Committee on Local Economic Governance statedThere are still many problematic local-level regulations. A study was conducted of 1,480 local ordinances – including local regulations and regulations/decrees of district heads/mayors – thataffect the business community, examining them from the juridical perspective, as well as in terms of their substance and principle. Juridicalproblems were considered the worst, with no fewer than 1,192 regulations (81%) identified as havingat least one problem from the juridical perspective. Around 72% of all the regulations examined had outdated juridical references, failing to refer to the most recent versions ofthe higher-level regulations. Moreover, 35% of all regulations examined were also legally incomplete.In terms of substance, 21% of regulations were found to lack clarity on time, cost and proceduralstandards (or fee structure and standards). Many regulations relating to business licensing haveproblems in these aspects. With regard to principles, 17% of regulations – most regulating commodity trading – were identified as having a negative economic impact. 28

mandate of these organizations certainly not to achieve social transformation through CSR. They can only enter areas where safety belts are already provided, such as government-endorsed development programs (such as the Millennium Development Goals); local government development schemes and programs; or state agencies that reasonably can be relied on at the local level. The riskier the environment, the more likely companies are to adopt basic, charity-like CSR programs. In short, CSR becomes formalized and proceduralised. However, CG principles can also help manage to CSR programs. Clear procedures, made in line with company prudent decision making structure can minimize risks. Companies might adopt, in varying ways, some principles of corporate governance in their CSR mechanisms. Therefore, establishment of CSR mechanisms is a matter of a company’s will, wits and influence. The dynamic capacity of a company refers to the extent that it is able to control the environment while having a greater impact (Helfat and Peteraf., 2009) i.e. through CSR programs. People may criticize narrow scope CSR programs. However, these limitations can be substituted by well- developed CSR programs that brings clear benefits for communities

References:

Aguilera, Ruth V., William Q. Judge, Siri A. Terjesen (2018), Corporate governance deviance. Academy of Management Review, 43: 1, 87-109

Birch, D. (2003). Corporate social responsibility: some key theoretical issues and oncepts for new ways of doing business. Journal of New Business Ideas and Trends, 1: 1-19.

Bahar, W. & Hadeli, M. (2014). Indonesia. Corporate Governance Review, Fourth Edition, Law Business Research, 172-184.

29

Campbell, J.L. (2006). Institutional analysis and the paradox of corporate social responsibility. American Behavioral Scientist, 7: 925-938.

Fiss, P.C. (2008). Institutions and corporate governance. In Greenwood, R, Oliver, C., Suddaby, R. & Sahlin-Andersson, K. (Eds.) Sage handbook of organzational institutionalism,

Sage

Publications.

Doidge, C., Karolyi, G.A., & Stulz, R.M. ( 2004). Why do country characteristics matter so much for corporate governance?. Fisher College of Business Working Paper No. 2006-03-008.

Famiola, M. & Adiwoso, S.A. (2016). Corporate social responsibility diffusion by multinational subsidiaries in Indonesia: organisational dynamic and institutional effect. Social Responsibility Journal, Vol. 12: 1.

Greenwood, R., Oliver, C., Suddaby, R., & Sahlin-Andersson, K. ( 2008). In The Sage handbook of organizational institutionalism, Sage Publication.

Ganie-Rochman, M. & Achwan, R. (2016). Corruption in Indonesia’s emerging democracy. Journal of Developing Societies, Vol 32:2, Sage Publication

Ganie-Rochman, M. (2008).Coping with difficult stakeholders in a transitional country, CSR PAPER 49.2008, Core Conference, Nottingham.,

Ganie-Rochman, M. (2002), An Uphill struggle: advocacy NGOs under Soeharto’s New Order. Unpublished Dissertation at the University of Nijmegen, the Netherlands.

30

Handoko-Widodo, C.N. (2007). Krisis komunikasi PT NMR dalam penanganan kasus Buyat (Communication crisis at PT NMR in handling buyat Case), Unpubished Dissertation at Department of Communication University of Indonesia.

Helfat, C.E. & Peteraf, M.A. (2009). Understanding dynamic capabilities: progress along a developmental path. Strategic Organization 7: 91-102.

Hohnen, P. (2009). Corporate social responsibility: an implementation guide for business. International Institute for Sustainable Development, Canada.

Jamali. D. (2014). CSR in developing countries through an institutional Lens". In Corporate social responsibility and Sustainability: emerging trends in developing economies. Published online: 08 Oct 2014; 21-44.

Jamali, D., Asem, M, Safieddine and Rabath, M. ( 2008).Corporate governance and corporate social responsibility synergies and interrelationships. Corporate Governance 5:443-459.

Marshall, S., Balator-Chrimes, & S., Pidani, O. ( 2013). Access to justice for communities affected by the PT Weda Bay Nickel Mine – Interim Report”. Non-Judicial Human Rights Redress Mechanisms Project.

Meyer, J.W. (2008). Reflection on institutional theories of organisations. In Greenwood, C. O., Suddaby, R., & Sahlin-Andersson, K. Sage handbook of organizational institutionalism, Sage Publications.

Kang, N. & Moon, J.(2012). Institutional complementarity between corporate governance and corporate social responsibility: a comparative institutional analysis of three capitalisms. SocioEconomic Review 1: 85-108.

31

Nee, Victor. 2005.The New institutionalism in economics and sociology. N. J. Smelser & R. Swedberg. Handbook of economic sociology (Eds.). Princeton University Press. Prajogo, D. & Devi, B. (2013). Mining and development in Indonesia: An overview of the regulatory framework and policies. International Mining for Development Center , Australia.

Price Waterhouse Coopers (2010, May). Mining in indonesia: investment and taxation guide.

Rao, K., & Tilt, C. (2016). Board composition and corporate social responsibility: the role of diversity, gender, strategy and decision making. Journal of Busines Ethics, 138, 2, 327. Roe, M. ( 2004). The Institutions of corporate governance. Discussion Paper No. 488, John M. Olin Center for Law, Economics, and Business, Harvard Law School.

Rosser, A. &d Edwin, D, (2010). The Politics of corporate social responsibility in Indonesia. The Pacific Review 1:1-22.

Scott, R.W. (2004). Reflections of half century of organizational sociology. Annual Review of Sociology 30:1-21.

Shamir, R.. (2010). The Age of responsibilization: on market-embedded morality. Economy and Society. 1:1-19.

Waddock, S. (2003). Myths and realities of social investing. Organization & Environment 3:369380

Wicaksono, A. (2008). Corporate governance of state enterprises: investment holding structure of government linked companies in Singapore, Malaysia and Applicability for Indonesian SOEs,

32

Unpublished Dissertation of the University of St. Gallen, Graduate School of Business Administration, Economics, Law and Social Sciences.

Material on PT Newmont Nusantara:

Interviews conducted in November 2013 with senior executives of the company. Newmont Annual Report. 2012

Material on ANTAM: Interviews conducted in November 2013 with senior executives of the company. Antam Sustainability Report from 2006-2012. Partnership and Community Development Reportsfrom 2010 - 2012 http://www.tribunnews.com/bisnis/2013/04/24/perusahaan-pelat-merah-ANTAM-malahkedodoran-di-bidang-perizinan. http://www.kendarinews.com/2011/content/view/22747/26/ (http://www.merdeka.com/peristiwa/bpk-sebut-pt-ANTAM-eksploitasi-hutan-tanpa-izin.html http://soccer.sindonews.com/read/2013/08/26/26/775344/pt-ANTAM-pulau-gebe-dilaporkan-kekomnas-ham

Materials on Weda Bay Nickel: Interviews conducted in November and December 2013 with senior executives of PT WedaBay Nickel. “The Land Preparation for Construction (LPC) Project: Environmental, Social and Health Impact Assessment” prepared for PT Weda Bay Nickel by PT AECOM Indonesia, 14 November 2011. http://www.antaranews.com/berita/356552/weda-bay-nickel-setujui-empat-poin-renegosiasikontrak

33

http://www.indonesia-investments.com/projects/government-development-plans/masterplan-foracceleration-and-expansion-of-indonesias-economic-development-mp3ei/item306 http://www.thejakartaglobe.com/archive/french-miner-eramet-to-invest-450m-in-halmaheranickel-project/ http://www.wedabaynickel.com http://www.eramet.com http://www.iso.org http://www.caoombudsman.org/cases/documentlinks/documents/WBN_Assessment_FINAL_wi th_appendices_ENG.pdf http://www.miga.org/news/index.cfm?aid=2615&pv=s

34