The Importance of Transparency in Good Corporate Governance

The current era of social media makes all kinds of information easy to obtain, including information about a company's business activities. This open era also demands companies to transform to be more open and transparent in carrying out their business activities. This aspect of openness and transparency is one of the elements of Good Corporate Governance which is also part of ESG standards. Companies that want to improve their quality, not only from the profits they get, but also from the governance that is their foundation, must transform to follow these good standards.

Aside from compliance to the regulation, transparency in the corporation also has various other benefits, such as:

1. Increasing organizational transparency encourages value creation that drives company performance. For example, in terms of employee performance assessments that are conducted fairly and transparently. Research shows that such assessments actually encourage employees to feel relevant and purposeful, hence driving performance and productivity. ¹‍
2. Consumer perception of the company's efforts to be transparent is considered positive, especially in the aspects of labor conditions and social responsibility. This also increases consumer trust in the company.²‍
3. Research from 2023 shows that there is increasing demand from customers for companies to disclose CSR and beyond. This can be good marketing for companies that really do CSR well.³

Before discussing ESG standards that are currently starting to be widely implemented, there is at least some important information that must be disclosed by a company based on the legal provisions currently in force in Indonesia.

The Bare Minimum Standards

There are several documents and information that must be published by companies as part of compliance with the law, namely:

1. Articles of Association/Memorandum of Association (AD/ART). AD/ART has become proof of the legality of the company that must be registered with the Directorate General of General Legal Administration (Ditjen AHU). In general, this information can be accessed by the public by paying PNBP through the AHU website.
2. Audited Financial Reports. This has become a general standard and is also required by Article 66 of Law 40 Year 2007 on Limited Liability Companies (“Law 40/2007”). The existence of audited financial reports also serves to minimize the occurrence of fraud.
3. Audited Financial Reports. This has become a general standard and is also required by Article 66 of Law 40 Year 2007 on Limited Liability Companies (“Law 40/2007”). The existence of audited financial reports also serves to minimize the occurrence of fraud.

The ESG Standards

Based on a survey conducted by EY in 2021, around 74% of investors stated that they are more likely to divest based on poor ESG performance.⁴  This shows the importance of conducting business activities in line with ESG principles and reporting them properly in sustainability reports. Therefore, it is important for companies to understand and apply ESG principles in their business activities.

The first element in ESG is the environmental aspect. This includes the impact of business activities on handling climate change, pollution, water resources, biodiversity and ecosystems, as well as resource use and circular economy. Then the social aspect which includes workforce, workers in the value chain, affected communities, and consumers. Finally, the good governance aspect which includes corporate governance, financial integrity, business ethics, diversity, and transparency.

Understanding and mainstreaming ESG principles is also important to convey to all shareholders, board of directors, management, employees, clients, and the public at large. Transparency is the key. In addition to internal company improvements, this can also be a good publication and branding for the company to the wider public.

Currently, there are so many ESG standards and reporting formats that companies can use to report their business activities. This will be discussed later on the in-depth article. What companies must focus and ensure is that the real actions of business activities are in line with the ESG principles. Without real actions, even the most transparent ESG reporting will be meaningless.

References

¹ https://www.emerald.com/insight/content/doi/10.1108/02621710710748248/full/html
² https://link.springer.com/article/10.1007/s10551-013-1916-7
³ https://www.sciencedirect.com/science/article/pii/S0007681322001306
⁴ https://www.ey.com/content/dam/ey-unified-site/ey-com/en-in/insights/tax/documents/ey-institutional-investor-survey.pdf

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