Does Law Matter in Asia? Comparing Corporate Governance Regimes in Indonesia and Malaysia

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https://doi.org/10.26826/law-in-context.v38i3.xxx

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Does Law Matter in Asia? Comparing Corporate Governance Regimes in Indonesia and Malaysia

Benedict Sheehy Professor, Canberra Law School, University of Canberra, ACT, Australia

Sarah Yu Assistant Professor, Canberra School of Politics, Economics and Society, University of Canberra, ACT, Australia Luther Lie Researcher, Faculty of Law, Universitas Indonesia, Depok, West Java, Indonesia

ABSTRACT

The question, “Does law matter?” reflects a fundamental concern of whether law is worth the attention and investment of public authorities. Often implied in the discussion is that other institutions, whether markets or informal established social practices, are preferable methods for organising the economy and may well do a better job of sat- isfying individual needs. This paper investigates the proposition that law does matter even in the Asian context where strong informal social practices persist by examining the corporate law of two very similar countries—Indo- nesia and Malaysia—that have such social practices. Using these two countries allows us to control for non-legal factors that significantly influence economic performance to provide evidence of whether law matters. Using empirical methods, we analyse data from the latest 10 year normal period (ie prior to COVID-19 disruption) and find that adoption of laws consistent with G20/OECD Principles of Corporate Governance substantially contributes to a jurisdiction’s economic performance at least as measured by stock market performance.

Keywords – Asia, Development Economics, Does Law Matter, Corporate Governance

Acknowledgments. We are grateful to acknowledge the Faculty of Law. University of Indonesia, which hosted the International Conference on Law and Governance (icLave) at The Sakala Resort Bali, Indonesia on November 7-8, 2018 where the preliminary ideas of the paper were presented.

Disclosure statement. No potential conflict of interest was reported by the authors.

License. This work is under Attribution-NonCommercial-ShareAlike 4.0 International (CC BY-NC-SA 4.0) https://creativecom- mons.org/licenses/by-nc-sa/4.0/

Suggested citation: Sheehy, B., Yu, S., and Lie, L., (2022). “Does Law Matter in Asia? Comparing Corporate Governance Regimes in Indonesia and Malaysia.” Law in Context, 38 (1): [pages]. DOI: http://doi.org/10.26826/xxxx

Summary 1. Introduction

2. Theoretical Foundations 2.1. Does Law Matter?

2.2. Research Methodology: Law and Institutions, Southeast Asia, and Comparative Corporate Governance 2.2.1. Law and Institutions

2.2.2. Southeast Asia: Indonesia and Malaysia

2.2.3. Comparative Corporate Law and Corporate Governance 3. A Note on Hypotheses and Method

4. Corporate Governance Codes and the OECD

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5. Indonesian Legal System, Corporate Law, and Corporate Governance 5.1. Origins of the Indonesian Legal System

5.2. Development of Indonesian Corporate Law

5.3. Development of Indonesian Corporate Governance

6. Malaysian Legal System, Corporate Law, and Corporate Governance 6.1. Origins of the Malaysian Legal System

6.2. Development of Malaysian Corporate Law

6.3. Development of Malaysian Corporate Governance 7. Financial Analysis

8. Conclusion 9. References Appendix

1. INTRODUCTION

This paper takes a novel approach to answering the fundamental legal question, “Does law matter?” using a focus on Asian development. It aims to contribute to answering the question by controlling for two major confounding variables found in comparative studies, namely, culture and geography, and in doing so strengthening the focus on the effects of law. Taking two highly similar countries with strong informal norms, the paper examines their corporate law regimes and their respective proximity to Organisation for Economic Co- operation and Development (OECD) standards and then examines the performance of their stock markets as re- flections of their distinct corporate governance regimes.

To understand the problem and the proposed legal method requires engagement with distinct literatures on law and society, legal origins, comparative law, and corporate governance. The paper reviews each of those literatures with particular attention where they touch upon the Asian context. While the paper does engage with finance, the focus and hence the theory and method are primarily from law.

The basic question for any social organisation, from country club to nation state is: “Does law matter?” The alternative to some type of effective formal law, promulgated by a public authority, is the ordering of social affairs on informal norms. The basic argument is that if law matters, great attention ought to be paid to under- standing it and how it can be used more effectively. By

1 Asia is clearly a large part of the world with a wide variety of different peoples.

the same token, if law does not matter, there is little justification for the great public interest and investment in it as social infrastructure. As Harel puts it:

Contemporary political and legal theory typically justifies the value of political and legal institutions on the grounds that such institutions bring about desirable outcomes-such as justice, security, and prosperity (Harel 2014, p. 1).

Disturbingly from some perspectives, this economic justification has faltered in the law and development debate as well as global policy generally (Ginsburg 2000, pp. 829-30)¹and specifically in Asia. As Ginsburg argues:

By most accounts, law has not played a major role in Asian economic growth (Ginsburg 2000, pp. 829- 30).

Ginsburg is answering counterfactual evidence of the hypothesis that rights matter (Clarke 2003, p. 89).

Noted law and economics scholar, Thomas Ulen argues that:

This of law and other institutions as the “golden key” to successful economic growth is misplaced (Ulen, Faure, and Smits 2011).

The failure of law to matter in Asia’s economic development requires further research. This failure leads to the query: if law, defined as formal positive rights and duties promulgated by public authority does not matter for economic development, what does? There are two

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obvious candidates: the natural environment or some aspect of the social environment.

At a basic level, the natural inputs for economic growth include things like climate, natural resources, and geographic location. The advantages and disad- vantages of natural settings, ‘initial endowments’, whether for primary production, or for trade routes or for access to trading partners, has been recognized since ancient times as having a major impact on economic development.² Likewise, it is common to observe that the social environment contributes significantly to economic development (Diamond 1998).³ Ideas and practices, culture and institutions, relating to production, trade and other forms of distribution, and indeed the idea of profit itself in capitalism, have had a major impact on how economies develop (Polanyi 1944; see also Malinowski 1921, pp. 7, 15).⁴ Indeed, some have argued that these social factors are more important than law (Pagano and Volpin 2001, pp. 505, 522; Stulz and Wil- liamson 2003, p. 314; Chinn and Ito 2006).

The challenge in this mix of factors is identifying, what role if any law has had. The situation may simply be, following the logic alluded to by Ginsburg, is that law does not matter. The implicit conclusion is that since formal law does not matter in Asian economic development, it must be that Asia’s strong informal norms con- tinue to outweigh and supplant the formal law (North 1987).This divergence between law and practice has been explored in the Asian context of Japan by Aoki who observed:

Law defines the formal rules, but we should ulti- mately be concerned with the ‘ways by which the game is actually played’ (Aoki 2007, p. 434).

The question of whether law matters is obviously too large and ambiguous a question to answer definitively.

Similarly, Asia itself is a large and diverse continent and cannot be studied as a whole; however, case studies from village to region-wide levels call for investigation and insight. Nevertheless, it is possible to contribute to

2 Note eg the comment on Herodotus’ work in Kirk, Lösch, and Berlin 1963, p. 367. See, McQueen 2016.

3 This is the thrust of Jared Diamond’s work. Diamond 1998 .

4 See also Malinowski’s work identifying the role of ideas and subsequent impacts on transfer of goods (although contested on other grounds). Malinowski 1921, pp. 7, 15.

answering the question by examining a situation in which one could control to some extent for both natural and social inputs, and then examine legal differences. To do so, one would look for countries that were similar in both natural and social terms but have some significant legal differences.

This line of reasoning leads to the following hypothesis: If two countries could be found that share a nearly identical geography, remarkably similar informal norms and have financial markets that are performing in highly similar ways, but the two countries have markedly different formal laws, the argument could be made that law does not matter per se. In such case, the sus- tained power of informal norms in the face of formal law, would support the conclusion that law matters much less than many governments, policy advisors and law reformers would hope. By way of contrast, where such highly similar countries had significantly different laws and related different financial market performance, there would be reason to support the view that law does matter. This article tests this broad theoretical statement by investigating performance of financial markets in Indonesia and Malaysia, two very similar countries with markedly different laws in terms of corporate governance.

This paper explores the issue in six sections. Section Two sets out the theoretical foundations, canvassing the rights debate, corporate governance research and the research methodology. The third section examines the origins and development of OECD corporate governance principles of best practice, which we use as the benchmark for assessing the strength of corporate law in Indonesia and Malaysia. Section 4 examines the origins of Indonesian legal system, the development of In- donesian corporate law and OECD compliance. Section 4 explains the origins of Malaysian legal system and the development of Malaysian corporate law and OECD compliance. Section 5 sets out the empirical data and analysis. The final section draws the conclusions.

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2. THEORETICAL FOUNDATIONS 2.1. WHAT DOES LAW MATTER?

At a higher level of abstraction, there are three main schools of thought investigating the question of whether law matters. These are: the rights debate, the informal norms ‘law in action’ and the legal origins scholarship.

First, in the rights debate, the view is that specific, substantive rights matter, a view of law supported by phil- osophical liberal thought. Essentially the view is that law’s specific rights and duties change or influence social relations. Influential theorists such as Dworkin, argue that ‘rights matter’ and are to be taken seriously (Dworkin 2013). The substance of their argument is that people, and hence societies, follow law, and accordingly, rights are trump in contest between opposing par- ties (Dworkin and Waldron 1984). Accordingly, developing, distributing and enforcing rights is critical in achieving social goals. This view is reflected in popular expressions such as the “rights revolution”, found in constitutional law (Sunstein 1990), and in the context of corporate law and governance and shareholders’ rights (Sheehy 2006).

The second opposing point of view is that informal norms, the actual practice, is what matters more than positive legal rights. This view traces its origins to the influential work of Roscoe Pound (Pound 1910, p. [*]).

In his 1910 work, “Law in the books and law in action”

Pound argued that institutional practices were the important, if informal, law whereas the formal law passed by legislatures and made by courts was of lesser concern. His ideas have been refined and taken forward in the Law and Society literature, examining the role of other institutions, formal and informal, in which law is marginalised and the balancing of interests, settling of disputes and unbalanced powers in society occurs elsewhere (Trubek 1989). It is with this second challenge that the current study engages.

Taking the question “Does law matter?” into the applied context of economic development, scholars have examined the role of formal law and argued that law is weaker than informal institutions in addressing development goals in some contexts. For example, in China, scholars have argued that informal and pre-liberal

social norms have held a much greater sway in the organisation of society than law (Sheehy 2005, p. 242;

Peerenboom 2002). Elsewhere in East Asia, law and society scholars have found that Taiwan’s small busi- nesses rely on informal norms drawn from long standing Chinese traditions to the “marginalization of law”

(Winn 1994, pp. 194-5). In their study of Indonesia, Ko- rea, Malaysia, Thailand and the Philippines, Iu and Bat- ten note that policy efforts to implement OECD Corpo- rate Governance Principles via positive law are challenged by strong local norms (Iu and Batten 2001). The current study aims to build on and advance this prior research on the extent to which law matters in the face of informal norms in South East Asia.

The rights-focused ‘Does law matter?’ debate has been well developed in corporate governance and particularly in comparative work. Governments, development experts and investors looking to determine a di- rection for law reform, have more asked a more focused question: “Law matters for what purpose?” That question can be reframed as: Does law matter for economic growth as much as, for example, its institutional com- petitor, markets? The current paper asks whether law matters sufficiently to invest in reforming laws to align with OECD standards. At a systemic level, it asks whether law’s substantive rights matter in the face of strong informal institutions.

The third approach to whether law matters is the legal origins debate which focuses on the origins of legal systems. Economists, following LaPorta et al.’s (LLSV) influential studies, focused on capital markets, investigated whether law had a significant impact on their development (La Porta, Lopez-de-Silanes, and Shleifer 2008); La Porta, Lopez-de-Silanes, and Shleifer 1999 p.

498; La Porta et. al. 1998, pp. 1116-7). The LLSV studies seemed to demonstrate a significant and enduring impact of historical financial institutional arrangements on present performance (La Porta, Lopez-de-Silanes, and Shleifer 2008); La Porta, Lopez-de-Silanes, and Shleifer 1999 p. 498; La Porta et. al. 1998, pp. 1116-7).

The argument arrived at the controversial conclusion that common law systems are superior for economic growth. The findings were widely circulated, highly

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cited and extensively used in policy development shap- ing law around the world.

The LLSV findings, however, have not withstood further scrutiny . Oto-Peralias’ detailed work, for example, established that countries inheriting French civil codes fared no worse than common law countries once other factors such as population density were taken into ac- count (Oto-Peralías and Diego Romero-Ávila 2014, p.

[*]). Historical empirical work by Mussachio, on finance rights and legal origins 1895-1913, when perhaps the legal systems were ‘purer’ having less interaction than in today’s era of globalization, also challenged LLSV. His work revealed that even in the purer era, contra LLSV, legal origins had much less impact on financial performance than politics (Musacchio 2008, p. 32). Klerman et al. argue that colonial legacy is more important than legal family (Klerman et. al. 2011, pp. 404-5). This empirical research echoes Roe’s work on stock markets argu- ing again that it was politics that mattered rather than legal origins (Roe 2006, p. 468). Similarly, Cabrelli and Siems find that legal origins do not adequately explain divergence or convergence in contemporary corporate law (Cabrelli and Siems 2015, pp. 114-5). These legally focused critiques are complemented by Spamann’s finance critique (Spamann 2010, p. [*]) and Beck et al’s findings (Beck et al 2003). As McQueen summarises the findings of these and other studies critical of LLSV, “a single factor explanation, such as positing that the na- ture of the adopted legal system in any particular colo- nised state is able to explain subsequent differing levels of economic performance appears not to be sustainable.

Rather, … a range of diverse factors brought to bear on specific colonial possessions by particular colonial powers would significantly influence the later, post-colonial economic prospects of particular states.” (McQueen 2016, p. 72)

A criticism of many legal origins studies, such as the just discussed LLSV studies and the World Bank Study, Doing Business, is that they engage in such a cursory evaluation of the legal systems that their findings are not particularly credible because their classifications of the legal systems of the world are inadequate and so lead to inadequately supported conclusions (Dam 2006,

p. 10). One study which stood out from the group was Pistor and Wellons, The Role of Law and Legal Institu- tions in Asian Economic Development, 1960-1995. In their elaborate study they found a relationship between law and development; however, their result satisfied no one. What they found was that legal reform followed economic development rather than leading it. And while they did find that law does have an effect, what they found was that it was not a one-way, causal relationship.

Rather, they came to accept a ‘differentiation hypothesis’ in which there is neither convergence nor isolated legal systems (Pistor and Wellons 1999). Pistor and Wellons study has been described as:

A fine attempt to deal with complex issues, avoiding simplistic explanations and stressing multidirec- tional causal relationships among legal change, economic development, and economic policy. It takes seriously the notion that law is embedded in culture and economic policy framework (Ginsburg 2000, p. 842).

While it is helpful to recognise the complexity of both the phenomenon of law and the environment, it goes no further in answering the basic question: Does law matter? Thus we conclude with Seims and Cabrelli that:

Notion of legal origins has only limited value in today’s corporate law (Cabrelli and Siems 2015, pp.

114-5).

Thus, given the weakness of the legal origins claim, we believe it can be safely relegated to the background and our findings attributed to other factors including differences in law.

2.2. RESEARCH METHODOLOGY: LAW AND INSTITU- TIONS, SOUTHEAST ASIA, AND COMPARATIVE COR- PORATE GOVERNANCE

In considering how we might answer the question, does law matter, we have taken an experimental method known as a ‘natural experiment’ method (Morgan 2013).The use of this method is growing significantly (Dunning 2012, p. 2). Specifically, we use what Dunning has classified as a ‘Jurisdictional Boundaries’ type experiment andDunning describes as follows:

[it] exploits the existence of political or jurisdictional borders that separate similar populations of

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individuals, communities, firms, or other units of analysis. Generally, because these units of analysis are separated by the political or jurisdictional boundary, a policy shift (or “intervention”) that af- fects groups on one side of the border may not apply to groups the other side. In broadest terms, those that receive the policy intervention can be thought of as having received a treatment, while those on the other side of the border are the controls (Dunning 2008, p. 286).

In our study, we see the similarity of populations as well as natural environment as highly similar independent variables and as such sufficient to control for other impacts on economic growth. The dependent variable is thus the policy environment, and more specifically, the different corporate law systems. The arbitrary policy choice of increased compliance with OECD Principles in one jurisdiction and not the other forms a natural experiment.

Unlike other studies which have focused on convergence with OECD Principles as producing better financial performance,⁵ our study takes as its assumption that greater compliance indicating stronger rights and duties over lesser compliance and less developed rights and duties improves financial performance. Thus, it is not compliance with OECD, but stronger rights producing effects. Finally, in terms of method, we have examined of the performance of financial markets, as exer- cises of positive law rights, to provide evidence of whether law matters. By examining the adjusted and normalised performance of the two markets in their distinct contexts over a ten-year period, we hypothesise that differences will result not from differences in soci- etal or natural factors, but from law. We explain our ad- justments, range of tests and analysis in detail below.

2.2.1. LAW AND INSTITUTIONS

In developing our analysis, we believe too narrow a focus on positive legal rights in inappropriate. Rather, attention to institutional context including economic factors is critical. In this vein we agree with Filatotchev et al.’s critique of economic studies that agency theory is too narrow an approach (Filatotchev, Jackson, and

5 A whole host of studies can be cited here. See eg the work of Siems and Alvarez-Macotela 2017, p. 312; Armour et. al. 2009, p.

[*];Armour et. al. 2009, p. 599; Siems 2008, p. 168.

Nakajima 2013, p. 968). As they argue, institutions drive the effectiveness of corporate governance arrangements and that universalist assumptions of self-interested principal-agent models used to explain differences are too narrowly conceived (Filatotchev, Jackson, and Nakajima 2013, p. 968). We adopt Filatotchev et al.’s view that the study of:

The effectiveness of corporate governance is con- tingent upon a number of organisational, social, and political factors…. Effectiveness depends on the specific formal and informal institutions (Fila- totchev, Jackson, and Nakajima 2013, p. 979).

Finally, we accept, as Filatotchev et al. specifically argue, that the difference of effectiveness between corporate governance regimes is likely to be a result of institutional contexts rather than divergence from ideal, best practice models—a matter hard to discern if one is comparing different institutional contexts (Filatotchev, Jackson, and Nakajima 2013, p. 966). That does not mean, however, that specific legal rights do not matter.

Rather, we believe that it is possible to determine whether law matters, only when one is able to eliminate or at least significantly reduce the effects of the institutional environment: that is by choosing sufficiently similar environments to allow law to stand out. The problem to date, we argue, has been finding environments which are sufficiently similar to focus on legal rights.

Accordingly, we adopt an institutionalist view of law, like Filatotchev, echoing the legal-anthropologist, Sally Falk Moore who described law as:

[A] very complex aggregation of principles, norms, ideas, rules, practices, and the activities of agencies of legislation, administration, adjudication and en- forcement backed by political power and legiti- macy (Moore 1973).

Again, it is important to emphasise that such a view of law does not preclude a focused, rights-based analysis. Indeed, to answer our question of whether law matters directly, it will be necessary to focus on a positive, distinct set of rights that can be compared across legal systems.

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Thus, to approach this question of whether law matters in a manner that controls for this myriad of variables it is preferable to examine countries that are very similar in the first instance and to do so in a niche, where law’s effects would be most evident and more easily tar- geted and teased out in the second. We have implemented this approach by two substantive choices. First, we choose Indonesia and Malaysia as very similar countries, and second by our choice of niche, corporate law and specifically as it relates to corporate governance.

We believe that investigating the impact of positive legal rights can best be done in the context of some of law’s classical, most clearly defined rights, namely, corporate and commercial rights traded in markets. Law, as a type of rule framework, forms the foundation of all markets.

Accordingly, examining market performance provides critical insight into the impact of law and whether it matters. We note at the outset that while we have at- tempted to avoid the pitfalls of LLVS’s cursory review, it is not possible to provide a comprehensive review of the distinct corporate laws, let alone the development of their legal systems as such would require a book length treatment. Finally, we wish to note, that while our paper engages in empirical, economic analysis, the aim of the paper is not such: rather, it uses the empirical to illus- trate and support the argument.

2.2.2. SOUTHEAST ASIA: INDONESIA AND MALAYSIA

In terms of our first choice, Indonesia and Malaysia, we note that the natural and social inputs of the countries are remarkably similar. Their current status as independent states tends to mask their very similar institutional configurations. They share cultural commonali- ties including a common root language which is used as the official national language, a tropical geographical location in Southeast Asia and further they share markedly similar histories: post-World War II independence, significantly long social and economic histories as colo- nies of European powers—albeit it different powers.

Further, they are both comprised of a multiplicity of di-

6 Transparency International ranks them as follows: Malaysia 61/180 and Indonesia 89/180 in 2018. See Transparency International 2018.

7 Macintyre 2001, pp. 92-3. This is not to say that the Indonesian and Malaysian politics are indistinguishable. Weiss 2007.

8 Eg Weiss considers the differences in politics and the related impact of the countries’ democratic reforms Weiss 2007.

verse ethnic groups. Finally, they both have strong eth- nically Chinese business communities—a matter of particular importance to our study and which is discussed in greater detail in the individual discussions of the corporate governance systems of each of the jurisdictions.

In their study of eight institutional dimensions of 13 major Asian business systems, Witt and Redding iden- tify Indonesia and Malaysia as markedly similar, having among the lowest dissimilarities of institutions (Witt and Redding 2013, p. 284) and belonging to a category they label “emerging Southeast Asian countries” (Witt and Redding 2013, p. 285). Witt and Redding’s model is significant because it takes law’s formal rules as sup- planted to a greater or lesser degree by informal institutions and uses that in their analysis of Asian countries.

Taking culture seriously, including legal culture (Nelken 2004), we note that like most of their neighbours in Southeast Asia, corruption—a matter of concern when trying to evaluate the impact of law—is rampant in both countries (The Jakarta Post 2019). Both countries score in the second quartile of Transparency International’s Perception Index in terms of corruption.⁶ Indeed, the literature identifies a marked similarity between contemporary institutions of government in Indonesia and Ma- laysia (Macintyre 2001, pp. 92-3).⁷ This is not to claim there are no differences between the countries.⁸ Their respective colonial and post-colonial legacies—Malay- sia with a more developed political and economic institutions, and post-colonial Indonesia with a kleptocratic dictatorship—have had an impact. Nor is our claim that these diverse nation states have homogenous populations—as noted, they both have significant diversity. Fi- nally, we note that topographically, they are different:

while Indonesia is an archipelagic country of some 17,000 islands, Malaysia is a bifurcated state located on the Malay peninsula and the northern part of the island of Borneo. Rather, the point is that Indonesia and Malay- sia share enough significant similarities to provide a useful comparison for purposes of this study.

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As noted, Iu and Batten find the corporate governance culture of the two countries to be markedly similar (Iu and Batten 2001). Despite the significant similarities, however, the countries have developed distinct positive corporate law regimes. This distinctiveness re- sults, as we have argued, not from their legal origins but from political decisions such as the decision to adopt or reject corporate governance features identified as significant by the OECD. In other words, following Gins- burg’s sharp observation of Pistor and Wellon’s study that while their work:

Takes seriously the notion that law is embedded in culture and an economic policy framework…. the missing word in this analysis is politics... and the analysis may therefore be incomplete from a schol- arly perspective (Ginsburg 2000, p. 842).

2.2.3. COMPARATIVE CORPORATE LAW AND CORPORATE GOVERNANCE

In terms of our second choice of corporate law as the fo- cal point for our comparison, as noted above, corporate law’s long history and well-defined rights make it a prime candidate for such study. In developing ideas about corporate governance, corporate law scholars, law and economics scholars and finance scholars have focused on the specific corporate law rights within the bounds of substantive corporate law (Stout et. al. 2016) connected among other things to broader debates about the empowerment and role of shareholders and share- holder primacy (Bratton and Wachter 2008, p. 101;

Smith 1997, pp. 277-8; Stout 2001, p. 1189; Stout 2013, p. 1173), stakeholders (Sheehy 2005), directors (Bain- bridge 2006, p. 1735), and managers. These basic corporate law rights are supplemented in corporate governance extending into principles of good corporate governance that impose obligations beyond corporate law to create an effective corporate governance framework (Plessis and Luttermann 2012, pp. 416-7), adding to the protection of shareholders (Siems and Alvarez- Macotela, p. 313), stakeholders (Lipton 2017), adding principles of disclosure and transparency (Keasey,

9 Echoing LLSV, law scholars Hansmann and Kraakman’s “The End of History for Corporate Law” took a triumphalist position.

Hansmann and Kraakman 2001, p. 461. There has been much debate and criticism. Hansmann has softened his position somewhat since his initial publication. See eg Rotman 2010.

Thompson, and Wright 1999), as well as clarity about responsibility of the Boards of Directors and Supervisor, and independent directors (Siems and Alvarez-Ma- cotela, p. 313).

Much corporate governance research has been a global search for optimal corporate governance standards, which would be expected to deliver optimal financial performance.⁹ Indeed, Bebchuk and Hamdani counted over 100 such studies years ago in 2009 (Beb- chuk and Hamdani 2008, p. 1313). Corporate governance has been taken up enthusiastically by the developed countries and institutionalized within them (Siems 2008, p. 227; see eg Chhaochharia and Grinstein 2007; Hooghiemstra and van Manen 2004; Baysinger and Butler 1985, pp. 101-2; Cheffins 2005, pp. 5-7), and exported to the rest of the developing world (Hopt 2011, p. 3; Pargendler 2016, p. 361). The leading trans- national organisation promulgating corporate governance standards is the OECD. The OECD has published its widely accepted global model as the G20/OECD Princi- ples of Corporate Governance (OECD 2015, p. 3).

The fundamental purpose of these standards is to ensure that business organisations are operated in such a way that economic efficiency and effectiveness are maximized and that basic principles of corporate law such as those that embody shareholders rights and directors’ duties are implemented (See Farrar 2003, pp.

67-8). These economic and legal objectives provide cer- tainty to investors and regulators that fraud, exploitation of minority shareholders, and other sorts of abuse are not being conducted through corporate vehicles and in contravention of agreements with government and investors.

The OECD published its most recent G20/OECD Principles of Corporate Governance in 2015 (Siems and Alvarez-Macotela, p. 311; OECD 2015, p. 3). These principles have become standards against which the rest of the world is benchmarked. Accordingly, we adopt the OECD’s model as the benchmark and examine the differences in compliance and divergence as indicative of

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underlying positive corporate law rights. The two countries, Indonesia and Malaysia, are significantly diver- gent on a number of positive rights and readers are re- ferred to the Appendix for full tables of comparison.

Our evaluation of those differences uses an empirical method: our comparators are the two major public bourses of Indonesia and Malaysia. They will be compared with respect to performance after controlling for the differences in composition (raw number of companies, size of economy, and multinational companies’ list- ings), initial size and liquidity. The comparison is over a ten-year period and is done in terms of value, profitability and growth by examining market capitalisation, total value traded and Standard and Poor’s Global Equity In- dices (S&P). Additionally, we note the depth of the respective markets, volatility, and liquidity. Combined, these measures provide evidence of the effectiveness of their respective corporate governance regimes which in turn provides information about the whether the difference between their corporate laws matter.

This paper investigates three distinct hypotheses.

Despite markedly similar geographical, cultural, historical, and institutional contexts:

H1: Different corporate governance systems produce different financial performance.

H2: Convergence toward OECD principles produce im- proved financial performance.

H3: Corporate governance systems matter in Southeast Asia despite cultural norms.

3. A NOTE ON HYPOTHESES AND METHOD We have hypothesised that the marked difference between Indonesia and Malaysia’s adoption of OECD norms will lead to different economic outcomes.¹⁰This hypothesis is problematic for two reasons: from an economic point of view, the current law and economics literature takes a much more nuanced approach than the earlier work of LLSV. As Licht writes:

10 See eg the analysis of OECD compliance in McGee 2009, p. 135.

11 In developing his variable for culture, Licht is unable to find a significant difference between the two cultures.

12 For discussion of the relationship between independent non-executive directors and financial crisis, see Ringe 2013, pp. 403-5.

The literature on causal relations among institutions and economic performance is in flux. Contem- porary proponents of the view that ‘law matters’ do not claim that a simple causal link runs from legal rules to economic outcomes. Likewise, the present evidence that culture matters does not imply that law does not matter (Licht, Goldschmidt, and Schwartz 2005, p. 250).

Attributing diverse economic outcomes to cultural differences, however, is unsatisfying as it does not provide a sufficient explanation for the difference between Indonesia and Malaysia which, with respect to a business culture, are quite similar (Licht, Goldschmidt, and Schwartz 2005, p. 250).¹¹ Although Indonesia has a markedly diverse culture and Malaysia is a combination of three cultures, we believe that the dominant Chinese business culture in both countries is sufficiently similar in those respective broader cultural contexts to be significantly discounted (See discussion below. For Indo- nesia see: Suryadinata 1985, p. 22; Robison 2009, pp.

315-6; Robison 1988, p. 59. For Malaysia see: William- son 2002, p. 401; Chew 2016, pp. 251-2). Accordingly, we adopt the traditional view: When a legal system im- plements principles of good corporate governance, it is expected to deliver direct and significant advantages to the economy both on microeconomic (Maher and An- dersson 1999, p. 4; Zhuang, Edwards, and Capulong 2001, p. 1; Khan et. al. 2018, p. 73), and macroeconomic (Maher and Andersson 1999, p. 4; see eg Mawutor 2014, p. 86; Caplan, Dutta, and Lawson 2010, pp. 24, 29) levels.

By way of contrast, when the principles of good corporate governance are ignored, corporate governance failures are to be expected which in turn may lead to broader financial crises (Maher and Andersson 1999, p.

4; see eg Mawutor 2014, p. 86; Caplan, Dutta, and Law- son 2010, pp. 24, 29).¹² In other words, although it may not be a neat one-to-one uni-directional, causal relationship, we hypothesise that there is some type of causal link between good corporate governance, sound microeconomic governance, and a healthy macroeconomic

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position however complex, dynamic and multidirec- tional it may be (Maher and Andersson 1999, p. 4).

Second, we have hypothesised that while culture matters, it can be excluded as a confounding variable because of our selection of countries. Culture’s power as informal norms over positive law is evident particularly where deep-seated cultures of corruption are operating.

This fact is particularly important in Southeast Asia, where, for example, Salim, in his analysis of corporate governance in Malaysia notes that:

There are factors both within and beyond the law which might act as a deterrent to shareholders from taking legal action against the company and/or its controllers (Salim 2011, p. 269).

These facts would lead to the question: To what extent and how does culture matter? And, more im- portantly, is culture a better explanation for economic differences than convergence toward or divergence from OECD norms? We have avoided this problem by choosing sufficiently similar cultures, including similar levels and norms of corruption, and so allowing this factor to be ignored.

4. CORPORATE GOVERNANCE CODES AND THE OECD

Corporate governance is the system by which companies are controlled and accountability structures and processes are imposed on those in control of companies (Farrar 2003, p. 66). The origins of the concept of corporate governance can be found in the 1976 Taming the Giant Corporation written by Ralph Nader, Mark Green, and Joel Seligman (Nader, Green, and Seligman 2005, p.

5). The concept of corporate governance subsequently developed in the UK in the 1990s in response to serious disruptions and scandals in business.¹³ The Cadbury Re- port of 1992 was an initiative of the Committee on the Financial Aspects of Corporate Governance to respond to the failures of British companies in achieving drive and efficiency, which in turn negatively affect the UK’s economy (Cheffins 2005, p. 2). The Cadbury Committee

13 Adrian Cadbury regarded Bob Tricker as the father of corporate governance in Tricker 2015.

14 See The UK Corporate Governance Code 2016 (United Kingdom), p. 1.

aimed to ensure the competitiveness of British companies by strengthening corporate accountability, especially the supervisory functions. This objective was put forward in the form of the UK Corporate Governance Code (Spira and Slinn 2012, p. 61),¹⁴ and implemented by requiring all London Stock Exchange-listed companies to comply with corporate governance standards and guidelines (Park 1992) and, alternatively, to provide reasons for such non-compliance (Norberg and McNulty 2013, p. 362; see also Hopt 2011, pp. 11, 15;

The Committee on the Financial Aspects of Corporate Governance and Gee and Co. Ltd. 1992, p. 10).

By April 1998, the OECD Council initiated the Ad- Hoc Task Force on Corporate Governance (OECD 1999, p. 3). The Task Force was responsible in formulating the principles of corporate governance. These principles, later be known as the OECD Principles of Corporate Governance, were the first initiative to provide guidelines of best practice to member States and later, to non- member States of the OECD, especially developing economies after the financial crises in the 1990s. The Princi- ples are not legally binding and serve as a form of soft- law recommendations (Bouchez 2007).

In 2004, the OECD Principles of Corporate Govern- ance were updated by the OECD Steering Committee on Corporate Governance based on the surveys of the de- velopments and experience of corporate governance drawbacks in both member States and non-member States. This update was followed by collaborations with the World Bank in organising the Regional Corporate Governance Roundtables to enhance corporate governance reform initiative at the regional level (OECD 2003, p. 5). In February 2015, the G20 Finance Ministers and Central Bank Governors requested the G20/OECD Cor- porate Governance Forum to be held on April 2015. The outcome of the Forum was a joint G20/OECD Principles of Corporate Governance issued in September 2015.

The G20/OECD has six principles which are drawn from predecessor corporate governance codes. These principles are:

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I.“Ensuring the Basis for an Effective Corporate Gov- ernance Framework” by requiring the branches and institutions of government have clear roles in law making, administration and adjudication and a legal duty to follow rule of law.

II.“The Rights and Equitable Treatment of Sharehold- ers and Key Ownership Functions.” This principle is focused on protecting independent and minority shareholders from exploitation by controlling shareholders.

III.“Institutional Investors, Stock Markets, and Other Intermediaries.” This principle requires institutional investors, brokers, and other agents to act in the best interest of their beneficiaries.

IV.“The Role of Stakeholders in Corporate Govern- ance.” This principle requires protection for the interest of stakeholders on matters such as timely disclosure, minimum wage, and bankruptcy claim.

V. “Disclosure and Transparency” This principle requires companies to disclose material information to the public and providing equitable treatment to all shareholders.

VI.“The Responsibilities of the Board of the Directors”

Finally, in its dealings with the directors, the principles require executive and non-executive directors and be accountable to shareholders and other interested stakeholders.

The present study uses these principles to develop the measures for the empirical analysis in section 5.

Each of Indonesia and Malaysia’s corporate governance systems is tested as against these G20/OECD principles.

We have only used five of the six provisions to create categories, having omitted the first principle as it is not

15 Cf. Gautama 1995, p. 4; Sheehy and Damayanti 2019, pp. 477-8.

16 According to C. van Vollenhoven, Indonesia has nineteen rechtskring or law-areas that are marked by their highly differentiated customary laws. See Haar 1962, p. 7.

17 Penetapan Presiden tentang Pencegahan Penyalahgunaan dan/atau Penodaan Agama [Presidential Decree on the Prevention on Misuse of Religion and/or Blasphemy] (No. 1) 1965 (Indonesia) elucidation to art 1.

18 Pancasila refers to five principles or fundamental norms, namely belief in God, just and civilized humanity, national unity, democracy, and social justice. See also Himawan 1997, p. 203.

19 For discussion of the economic success of Chinese Indonesian community, see Suryadinata 1985, p. 22; Robison 2009, pp. 315-6;

Robison 1988, p. 59.

20 Indische Staatsregeling [Pre-World War II Colonial Devolved Authority Constitution] (Indonesia) art 131 (2a)-(2b).

limited to positive corporate law. To the extent that the systems identified in the first G20/OECD principle is found in evidence in Indonesia and Malaysia, they are very similar and hence insignificant for our purposes.

5. INDONESIAN LEGAL SYSTEM, CORPORATE LAW, AND CORPORATE GOVERNANCE

5.1. ORIGINS OF THE INDONESIAN LEGAL SYSTEM

Indonesia is a sprawling archipelagic state composed of 17,000 islands located on the equator. It is the fourth most populous country in the world and home to more than 500 ethnic groups (Indonesian Statistics Agency 2010, p. 5). The contemporary country was born out of a violent conflict between August 17, 1945 and Decem- ber 27, 1949 (Fogg 2015, pp. 317, 322, 325)¹⁵ when after World War II, the Dutch former colonial power at- tempted to reassert control. Indonesian forces were successful and identified a permanent population, a defined territory, a government, and gained international recognition (see Shearer 1994, p. 85). Indonesia has a pluralistic legal system composed of civil law of Dutch extraction, local customary ‘adat’ laws,¹⁶ and Islamic laws (see Gautama 1995, pp. 5-7; see also Otto 2009, pp.

15-6). Although Islam is the dominant religion, Indone- sia is not a theocracy and has no single national religion.¹⁷ Rather, it has upheld a nationalistic state ideology of ‘Pancasila’ as its unifying ideology.¹⁸ Within the country, there is a small but economically significant Chinese business community.¹⁹

Turning to its legal system, pre-World War II, the Dutch devolved authority via a quasi-constitution (In- dische Staatsregeling) which defines the principle of concordance as the application of Dutch laws in the Dutch East Indies, as it was then called.²⁰ Upon

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independence, Indonesia continued the centuries-old Dutch civil laws through the concordance principle (Gautama 1972, pp. 265-6). Indeed, the situation pre- vails to the present day because the Indonesian government declared that all pre-independence laws remained valid unless specifically repealed, amended, or replaced.²¹

This concordance principle is manifest in the initial Commercial Code of the 19^th Century which included corporate law.²² Despite a few minor reforms, it remained largely untouched until the 1997 Asian Finan- cial Crisis (Mahy 2013, pp. 420-1). To resolve the financial crisis, Indonesia had no feasible alternative but to sign the International Monetary Fund Letter of Intent for a bailout in exchange for a reform of its business law largely based on the US corporate governance model (Sheehy and Damayanti 2019, pp. 476, 479).

5.2. DEVELOPMENT OF INDONESIAN CORPORATE LAW The Commercial Code (Wetboek van Koophandel) gov- erned Indonesian corporate law for more than a century (Gautama 1995, p. 278) until a significant business law reform was started in 1995 just prior to the financial crisis (Mahy 2013, p. 415; Pakpahan 1994, p. 509). The 1847 Commercial Code was an adaption from the company law of the Netherlands which itself was a deriva- tion from the French Napoleonic Code (Sheehy and Da- mayanti 2019, p. 478). Initially, the Commercial Code applied exclusively to foreigners: Europeans, Japanese, and Thais and only later to Indonesians on matters for which local customary laws were insufficient (Gautama 1995, pp. 5-6). The Commercial Code is still in force in Indonesia²³ as a lex specialis to the Indonesian Civil Code.²⁴ Law No. 1 of 1995 regarding the Limited

21 Undang-Undang Dasar Republik Indonesia 1945 [The 1945 Constitution of The Republic of Indonesia] (Indonesia) art I Transitional Provision.

22 Wetboek van Koophandel [Commercial Code] (No. 23) 1847 (Indonesia) arts 36-56.

23 Undang-Undang Dasar Republik Indonesia 1945 [The 1945 Constitution of The Republic of Indonesia] (Indonesia) art I Transitional Provision.

24 Wetboek van Koophandel [Commercial Code] (No. 23) 1847 (Indonesia) art 1.

25 Undang-Undang tentang Perseroan Terbatas [Law on Limited Liability Company] (No. 1) 1995 (Indonesia) art 128(1).

26 Undang-Undang tentang Perseroan Terbatas [Law on Limited Liability Company] (No. 40) 2007 (Indonesia) art 160.

27 Ibid art 1.4.

28 Keputusan Menteri Koordinator Bidang Perekonomian tentang Komite Nasional Kebijakan Governance [Decree of the Coordinating Minister for Economic Affairs on the National Committee on Governance Policy] (No. KEP/49/M.EKON/11/2004 amended by No. KEP- 14/M.EKON/03/2008) 2008 (Indonesia).

Liability Company replaced Articles 36–56 of the Com- mercial Code and thus unified the Indonesian company laws.²⁵ Law No. 40 of 2007 regarding Limited Liability Company, the most recent reform of company law, re- voked and placed Law No. 1 of 1995 regarding the Lim- ited Liability Company.²⁶Law No. 40 of 2007 regarding the Limited Liability Company, is a modern corporate statute and shows a hybrid of Dutch civil and American common law systems (Sheehy and Damayanti 2019, pp.

479-80).

Indonesian company law mandates a two-tier board structure as a result its adoption of the Dutch Commer- cial Code of the 1800s (Schilling 2001). The dual structure creates a Board of Directors which governs along- side the Board of Supervisors (Himawan 1973, p. 143).

Substantively, the Indonesian law is the same as the Dutch Civil Code regarding Public and Private Limited Company in that the Board of Directors is an organ of the company distinct from the Board of Supervisors.

The third organ of the company is the General Meeting of Shareholders.²⁷

5.3. DEVELOPMENT OF INDONESIAN CORPORATE GOV- ERNANCE

Indonesia’s Code of Good Corporate Governance 2006 (CGCG 2006) was formulated by the National Commit- tee on Governance Policy²⁸ (previously the National Committee on Corporate Governance Policy) to set the guidelines for the Board of Supervisors in supervising and advising the Board of Directors. Prior to the formu- lation of the CGCG 2006, the Committee drafted a code in 1999 (National Committee on Governance 2006, p. 1), which was subsequently amended in 2001 (Daniri 2016, p. 70). Indonesia’s CGCG 2006 neither follows

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‘comply or explain’ nor the ‘apply or explain an alternative’ approach (National Committee on Governance 2006, p. 2).

In terms of its compliance with G20/OECD norms, Indonesia is not a leader. Of the five measures drawn McGee²⁹ and discussed in detail below, Indonesia just managed to achieve a score of 3/5 in four of the measures, with the fifth measure falling at 2.8. (See Ta- ble 1) For a more detailed analysis, see Appendix.

Table 1 Corporate Governance Scores

Across all measures, Indonesia achieved an unremarka- ble 2.96/5. (See Table 2)

Table 2 Corporate Governance Scores Category

Total points

Number of

items Average

Rights of shareholders 17 6 2.83

Equitable treatment of shareholders

9 3 3.00

Role of stakeholders in corporate

governance

12 4 3.00

Disclosure and transparency 12 4 3.00 The responsibility of the

Board of Directors

18 6 3.00

Overall average 2.96

29 McGee 2009, pp. 135-41.

30 Civil Law Act 1956 (Malaysia) s 3.

31 Ibid s 5.

6. MALAYSIAN LEGAL SYSTEM, CORPORATE LAW, AND CORPORATE GOVERNANCE

6.1. ORIGINS OF THE MALAYSIAN LEGAL SYSTEM

Malaysia is bi-located on the end of the Malay peninsula and the northern portion of the island of Borneo. Origi- nally, it included the state of Singapore which was ex- pelled from the union in 1965 and became its own country. Malaysia too is in part the result of a post-World War II conflict among Malays, Chinese and communists with the British Empire, a conflict which lasted from 1948 until 1960. Today, Malaysia is composed primarily of ethnic Malays, Chinese and Indians (Williamson 2002, p. 401; Chew 2016, pp. 251-2).

Like Indonesia, Malaysia has an economically significant Chinese business community (Suryadinata 1985, p. 15; Gomez 1999, p. 8). The Chinese community in Ma- laysia, however, forms a larger proportion of the population than its Indonesian counterpart (Suryadinata 1985, p. 15). Islam, as the national religion, has a strong influence on culture and conduct as well as the country’s legal system (Adil and Ahmad 2016, p. 264).Upon gain- ing dependence from Britain, Malaysia retained its plu- ralist system of Anglo-Saxon common law, Islamic law, and local customary law (Chew 2016, p. 253; Tew 2011, pp. 3-4). Under the Civil Law Act 1956, the Malaysian courts apply the English common law and rules of equity, as the local circumstances require.³⁰ In terms of corporate governance, Malaysia has continued its reli- ance on the UK and further, been influenced by Austral- ian and Indian legal systems—themselves both systems derivative of the UK (Noordin and Supramaniam 2013).

6.2. DEVELOPMENT OF MALAYSIAN CORPORATE LAW As with the general reception of English law in Malaysia, like Dutch law in Indonesia, the pre-existing commercial law continued in the absence of legislative reform.³¹ Ac- cordingly, Malaysian company law has the common-law one-tier board structure (Mallin 2013, p. 309) inherited from the Common Law tradition (Block and Gerstner 2016, pp. 1, 6, 42). The Malaysian Companies Act 2016,

2.83 3 3 3 3

0 1 2 3 4 5

Rights Treatment Role D&T Board Corporate Governance Scores - Indonesia

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stipulates that the Board of a company solely refers to the Board of Directors.³²Thus, unlike Indonesian company law, there is no Board of Supervisors. Further, the Malaysian Code on Corporate Governance, states the Board of Directors is not necessarily part of the manage- ment—again a distinction from Indonesian law.³³ Thus, in Malaysia, officers of the company are responsible for the execution of the Board of Directors’ decisions rather than the directors themselves.

6.3. DEVELOPMENT OF MALAYSIAN CORPORATE GOV- ERNANCE

The Malaysian Code on Corporate Governance (MCCG) was introduced by the Malaysian High Level Finance Committee on Corporate Governance in 2000 and subsequently amended in 2007, 2012, and 2017.³⁴The MCCG is modelled on the UK Corporate Governance Code as formulated by the Cadbury Committee (Sulaiman and Othman 2015, p. 261).The MCCG defines corporate governance as the way the company is di- rected and managed by balancing corporate accountability and business profitability, in order to realize the interests of shareholders and other stakeholders,³⁵and that these are principles of good corporate governance (Vithiatharan and Gomez 2014, pp. 599-600; Tricker, Clarke, and Branson 2012).

The MCCG 2012 takes a ‘comply or explain’ approach:³⁶recommendations can be set aside, but only with justification. This approach is further evidence of significant modelling on common-law.³⁷ The MCCG 2017 takes a slightly different approach, namely ‘apply or explain an alternative’.³⁸It allows a company to opt for an alternative method for complying with the Code 2017 provisions.

32 Companies Act (No. 777) 2016 (Malaysia) s 2(1).

33 Malaysian Code on Corporate Governance 2017 (Malaysia) s 2.1.

34 Ibid ss 2.1-2.5.

35 Ibid s 1.1. The Code reiterates the definition of corporate governance as set out by the High Level Finance Committee on Corporate Governance in its 1999 report.

37 Beyond the UK Corporate Governance Code 2016, the NYSE and the Australian ASX have adopted a ‘comply or explain’ approach.

Origins are discussed in Andrew Keay (2014), “Comply or explain in corporate governance codes: in need of greater regulatory oversight?” Legal Studies, 34: 279, 280.

In terms of the G20/OECD Principles, Malaysian corporate law and corporate governance performs reason- ably well. It has achieved 4 out of 5 on 2 measures and is above 3 on the balance. (See Table 3) For a more detailed analysis, see Appendix.

Table 3 Corporate Governance Scores

As an average, it has a score of 3.83/5 compared to Indonesia’s 2.96. (See Table 4) (McGee 2009, pp. 135- 41).

Table 4 Corporate Governance Scores Category

Total points

Number of

items Average

Rights of shareholders 22 6 3.67

Equitable treatment of share-

holders 11

3 3.67

Role of stakeholders in corpo-

rate governance 16

4 4.00

Disclosure and transparency 17 4 4.25 The responsibility of the

Board of Directors

22 6 3.67

Overall average 3.83

We turn next to examine and analyse how the two corporate governance systems of Indonesia and Malay- sia compare with reference to compliance with G20/OECD and perform in terms of financial markets.

3.67 3.67 4 4.25

3.67

0 1 2 3 4 5

Rights Treatment role D&T Board Corporate Governance Scores - Malaysia

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We thus turn to examine the empirical evidence to answer whether law matters.

7. FINANCIAL ANALYSIS

In economic terms, Indonesia is ranked the world’s 16th largest economy measured in nominal gross domestic product (GDP) and ranked seventh on purchasing power parity (PPP) valuation. With an estimated population of 271 million, nominal GDP in Indonesia is valued at USD1,119,191 million in 2019. Malaysia has a smaller estimated population of 31.9 million. The nominal GDP in Malaysia is valued at USD364,702 million in 2019, which is ranked the 36th in the world. The PPP valuation for Malaysia is at the 26th ranking (World Economic Outlook Database 2020).

As noted, the corporate governance used for our analysis were drawn from the G20/OECD detailed above. The distinct conformity patterns of Indonesia and Malaysia were investigated and evaluated by McGee who assigned points to each category as follows: O = Ob- served (5 points); LO = Largely Observed (4 points); PO

= Partially Observed (3 points); MNO = Materially Not Observed (2 points); and NO = Not Observed (1 point).

Figure 1 provides a comparison of Indone- sian and Malaysian corporate governance compliance scores. It is noted that Malaysia is significantly more compliant with OECD.

Figure 1 Indonesia and Malaysia corporate governance compliance scores

Stock exchanges in many countries were established initially as member-owned organisations or government institutions. Since the mid-1990s, however, many stock exchanges have transformed into privately owned, for-profit or not-for-profit corporations (see Sheehy 2006).Asian exchanges, like other exchanges around the world have been transformed by privatisa- tion and industry consolidation. Two stock exchanges in Indonesia merged in 2007 to form the Indonesia Stock Exchange and became a privately-owned corporation.

The stock exchange in Malaysia transformed to a Joint Stock Company in 2004 and is a self-listing company, listed on its own market.

Figure 2 shows a summary of the Indonesia Stock Exchange (IDX) and Malaysia Stock Exchange (BURSA) at the end of 2019. Though the number of listed companies in BURSA is higher than IDX, the market capitalisation and value of stock traded in BURSA is lower than that in IDX.

Figure 2 IDX and BURSA Malaysia as of End 2019

Source: World Federation of Exchanges and stock exchanges’

websites For a better comparison of the size of the stock markets, market capitalisation is benchmarked against the size of the economy (Table 5). It is noted that once controlled for the size of the economy, the ratio of market capitalisation to GDP is higher in Malaysia than Indone- sia. The ratio of the total value of shares traded to GDP and the total value of shares traded to the market capitalisation (turnover ratio), are two indicators to demonstrate stock market liquidity. Both liquidity ratios are higher for Malaysia.

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Table 5 Key Indicators for IDX and BURSA as of End 2019

Stock ex- change

Market capi- talisa-

tion/GDP

Total value traded/GDP

Turnover

IDX 0.47 0.10 0.23

BURSA 1.10 0.38 0.27

Source: World Federation of Exchanges, stock exchanges’

websites and IMF World Economic Outlook database.

To evaluate the financial performance of companies in Indonesia and Malaysia, a comparative analysis of the two stock exchanges in Indonesia (IDX) and Malaysia (BURSA) over a ten-year period from 2009, being the end of global financial crisis to 2018, will be conducted.

Companies raise equity capital by using the primary public equity market via initial public offering (IPO).

Figure 3 shows the total amount of equity raised through IPOs in Indonesia and Malaysia and the total number of newly listed companies each year between 2009 and 2018. Though the average number of newly listed companies is higher in Indonesia, the average value of the total amount of equity raised is higher in Malaysia.

Figure 3 IPO by Indonesia and Malaysia

Source: OECD Capital Market Series dataset

S&P measures the USD price change in the stock markets covered by the S&P/IFCI and S&P/Frontier Broad Market Index country indices. The indices are float-adjusted, market capitalisation-weighted and include security classifications for country, size, style, and industry. Figure 4 shows the annual percentage change of S&P Global Equity Indices for IDX and BURSA during the period of 2009 to 2018.

Figure 4 S&P Global Equity Indices (Annual % Change)

Source: Standard & Poor's, Global Stock Markets Factbook and supplemental S&P data To understand the volatility of the IDX and BURSA, statistical analysis has been conducted on the S&P indices for the period of 2009 to 2018. From Table 6, it is noted that BURSA (SD=7.06) is comparable less volatile than IDX (SD=14.02).

Table 6 Statistical Analysis on IDX and BURSA S&P

IDX BURSA

Mean 16.86 6.99

Standard Devia- tion (SD)

14.02 7.06

Minimum -24.2 -20.6

Maximum 130.1 46.7

Range 154.3 67.3

Source: Analysis based on S&P, Global Stock Markets Factbook and Supplemental S&P data To provide a full picture of the IDX and BURSA stock exchange, the number of listed domestic companies, market capitalisation and value of stock traded in billion USD for the period of 2009 to 2018 are provided in Ta- ble 7.