120821 nk canberra ausaid - partnering for development

PARTNERING FOR DEVELOPMENT Toward sustainable business and communities in developing countries

Noke Kiroyan

Arguably, the phenomenon of companies functioning as development agents in the

economic sense can be traced as far back as the Dutch East India Company (known under its

Dutch acronym VOC in Indonesia) that operated in the seventeenth and eighteenth

centuries in the archipelago that, in the twentieth century, became the independent nation

of Indonesia. Of course, being the object of massive exploitation of people and resources by

this private company, present-day Indonesians would protest that rather than being

development agents, VOC was a precursor to colonialism. However, it is undeniable that in

a sense some of the giants in the business world of bygone days, VOC in Indonesia and the

British South Africa Company in Zambia were performing functions that would nowadays be

regarded as belonging to the domain of government (Blowfield, 2010).

Currently, discussions about the role of business in development would invariably

lead to the topic of Corporate Social Responsibility (CSR) that has unfortunately acquired a

bad connotation in some quarters due to the misuse of the concept for Public Relations

purposes. I am not saying that companies should refrain from including CSR programs and

concepts in their reputation building scheme, but overzealous publicity-seeking using the

CSR platform may backfire as it is regarded as a gimmick. Or worse, people suspect it is a

smokescreen or cover-up for corporate wrongdoings. The term “greenwashing” specifically

refers to excessive showcasing of CSR – particularly in regard to the environment – that has

given a bad name to a highly relevant and virtuous practice, if conducted properly.

Having said all the above, CSR has been widely practiced as part of strategic

management to secure and maintain a license to operate by engaging stakeholders in

addressing the social and environmental impact of companies through transparent and

ethical behavior. As such, CSR will continue to have a broad following among companies

adhering to best practice and aspiring to contribute to sustainable development.

I am going to talk about CSR in these terms, that is engaging stakeholders for mutual

benefit as spelled out in ISO 26000 that defines Social Responsibility as the responsibility of

an organization for the impacts of its decisions and activities on society and the

environment, through transparent and ethical behavior that:

Contributes to sustainable development, health and the welfare of society;

Takes into account the expectations of stakeholders;

Is in compliance with applicable law and consistent with international norms of

behavior; and

Is integrated throughout the organization and practiced in its relationships

AusAID 2012 Consultative Forum with Business Canberra, August 21, 2012

Partnering for Development - Noke Kiroyan

The seven core subjects in ISO 26000 are Human Rights, Labor Practices, The

Environment, Fair Operating Practices, Consumer Issues, Community

Involvement/Development, and finally Organizational Governance. The last one underpins

and binds the other six subjects together. I will focus on Community Involvement and

Development that explicitly encourages organizations to be actively involved “in

institutional strengthening of the community, its groups and collective forums, cultural,

social and environmental programmes and local networks involving multiple institutions.”

(International Organization for Standardization, 2010). This is particularly relevant to

developing countries like Indonesia. As well, it provides an internationally recognized

institutional framework for cooperation between various government bodies in a host

country, NGOs, development agencies and individual companies as well as business

associations in assisting or accelerating economic and social development.

Please allow me at this point to discuss at some length a peculiar Indonesian

situation in relation to Corporate Social Responsibility. The current Law on Limited Liability

Companies (Law No. 40/2007) contains several articles relating to Corporate Social

Responsibility as understood by the Indonesian Government and Parliament. Particularly

onerous is Article 74 of the Law, the translation of which I will cite in full as follows:

Paragraph 1) – Corporations in the business of and/or whose business relate to

natural resources must conduct social and environmental responsibility

Paragraph 2) – Social and environmental responsibility as stipulated under

paragraph 1) is a corporation’s obligation that is budgeted and treated as costs

of the corporation and implemented with due consideration of propriety and

reasonableness

Paragraph 3) – Corporations that neglect their obligations as stipulated under

paragraph 1) will be sanctioned under the prevailing laws

Paragraph 4) – Further legislation on social and environmental responsibility

will be established under a Government Regulation

On July 16, 2007, just a month before the law came into force, having been apprised

of the “CSR provisions” in the law being drafted that would entail companies having to set

aside an amount equivalent to 5% of net profit for social and environmental responsibility,

Indonesia Business Links initiated a public forum involving thirty influential business

organizations including KADIN Indonesia, the Indonesian Chamber of Commerce & Industry.

The ad hoc coalition petitioned Parliament to withdraw these provisions and enlisted the

support of prominent personalities. The business organizations were perplexed about hints

that a special body would be established to manage the 5% collected from companies. The

joint action achieved some measure of success. In the face of this massive opposition,

Parliament relented and amended paragraph 74 but insisted that the compulsory ruling on

social and environmental responsibility must remain. Importantly, the 5% requirement was

dropped, the end result being the current wording of paragraph 2) cited above.



In 2008, the Indonesian Chamber of Commerce & Industry – jointly with the

Association of Indonesian Young Entrepreneurs (HIPMI) and the Association of Women

Entrepreneurs (IWAPI) filed for judicial review of Article 74 of the law with the

Constitutional Court, but the plea was ultimately rejected.

The Government Regulation as indicated in Paragraph 4 of the article took five years

to complete. Finally, it was issued in April this year, basically reiterating Article 74. However,

it does provide an important clue on “prevailing laws” mentioned in paragraph 3) of the said

article. They are specified as legislation on natural resources or that relate to natural

resources and those that regulate business ethics. A number of laws regulating sectors and

activities are highlighted as examples, among others on state-owned enterprises, forestry,

industry, geothermal energy, electricity, mining of minerals and coal, preservation of the

environment and human rights.

An unwanted by-product of the long gestation period of the Government Regulation

is that in the absence of the implementing legislation, many regions have taken matters into

their own hands. Inspired by the original draft of the law, a number of local governments

have introduced regulations requiring companies to provide the “discounted” amount of

2.5% from profit for their version of Corporate Social Responsibility.

KADIN Indonesia and like-minded organizations, among others the National

Commission on Governance, Indonesia Business Links and the Institute for Commissioners

and Directors of Indonesia are currently advocating for an amendment of Article 74 by

referring to ISO 26000. The Indonesian Government represented by the National

Standardization Body is among those that accepted the final version of the international

standard officially launched in November 2010. The argument put forward by the

organizations is that Article 74 contradicts the definition of Social Responsibility in ISO

26000 that is supported by the government. The battle rages on and the end is not yet in

sight.

Indonesian companies are not against participating in the development of

communities. On the contrary, Corporate Social Responsibility in its various manifestations

is recognized as being part of doing business amidst a society in which major segments of

the population have only just begun to participate in the modern economy and where huge

discrepancies may threaten the social fabric. However, the fact that the multi-faceted and

evolving concept of Corporate Social Responsibility was captured within the narrow confines

of a law that is simultaneously punitive and ambiguous is a major cause for worry. The

Indonesian business community now seeks refuge in the international standard of ISO

26000 as an acceptable common platform for business and its stakeholders, including

government and the communities.

Reverting to the topic of today’s forum, possible areas of cooperation between

business, development agencies, universities and NGOs could include:



Public governance training for officials in the regions

Enhanced or alternative livelihoods training for local communities

Skills training for farmers and artisanal miners

Stakeholder management

Conflict resolution

When I was in charge of a major coal mining company called Kaltim Prima Coal (KPC)

in the early 2000s at the time it was a joint-venture between BP and Rio Tinto, I attempted

to put in practice community development that was geared to economic growth. The

Institute for Economic and Social Research of the Faculty of Economics, University of

Indonesia, was commissioned to conduct macroeconomic research into the impact of the

company on the local and national economy. The findings of the research showed that at

the time Kaltim Prima Coal produced a multiplier effect in fiscal terms of 1.9, meaning that

every dollar spent by the company generated output in all economic sectors of almost twice

its value. In terms of employment, the multiplier effect was 14, in other words, every direct

employment by the company generated 14 jobs.

My thinking at the time was to conduct community development focused on

stimulating local economic growth, including increased capacity building of local businesses

to enable them to participate in the company’s supply chain. Combined with the economic

activity of extracting and selling coal my objective was to increase the company’s multiplier

effect over time. Every two or three years the multiplier effect would be measured again as

a management tool for aligning the company’s core business with well-defined community

development programs to spur economic development. In October 2003 the mine was sold,

so I did not have the opportunity to bring the experiment to a conclusion.

Apart from partnerships with business entities, possibilities for partnering exist for

development agencies at a G-to-G level, such as:

Comparative study of community development and capacity building in various

countries.

Joint study and promotion of selected economic sectors, e.g. agriculture, mining,

cattle breeding and dairy industry, for targeted development efforts in alignment

with mutual interests identified in economic partnership agreements.

Many other initiatives may be developed by creating synergies between various

sectors of development with business enterprises, local or national government agencies as

well as institutions of higher learning. I hope my presentation may provide some input for

further work by development agencies in partnership with business.

References Blowfield, M.E., “Business, Corporate Responsibility and Poverty Reduction” in Corporate Social Responsibility and Regulatory Governance - Peter Utting and José Carlos Marques (editors), Palgrave MacMillan, 2010

International Organization for Standardization, “ISO 26000: Guidance on social responsibility,” 2010

120821 nk canberra ausaid - partnering for development

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