Corporate Social Responsibility in Indonesia

Building internal corporate values to address challenges in CSR Implementation1

Yanti Triwadiantini Koestoer 2

ABSTRACT

Only in recent years, CSR has been taking its momentum among the business society in
Indonesia. The economic crisis and reformation era have brought up a new spirit of
transparency, democracy, and social awareness. Initiated by multinational companies, now,
more and more companies operating in Indonesia are adopting CSR because they believe it is
the right thing to do. However, its implementation is not always easy due to some external
factors affecting business.

This paper attempts to look at major obstacles of CSR implementation in Indonesia related to
business environment, as well as how leading corporate citizens build good internal values to
address such challenges. Based on the author’s observations in the last few years, and
surveys conducted by various organizations, general analysis was made to provide practical
guidance for CSR practitioners.

Each country within the ASEAN region has its own conditions and challenges, many of them
similar to Indonesia’s situation. Within the spirit of promoting ASEAN integrity, the author
believes that sharing corporations’ knowledge and experiences will allow comparative
references among ASEAN countries in order to address common social/environment issues
through CSR best practices.

1. INTRODUCTION

Globalization and the declining capacity of public sector to serve community has
triggered the growth of corporate sectors’ roles from poverty alleviation to preserving
biodiversity. This trend is incremental along with similar growth of civil society organizations.
The term corporate governance refers to compliance with laws and regulations, by
which companies need to playing by the rules, acting in a responsible manner, and paying
more attention on business ethics and integrity (Rees, 2006). The evolutionary notion of
business strategy has been shifting to address social responsibility, due to the increasing
pressure from employees and public at large.
These days, companies are regarded as socially responsible if they can create good
shareholder values, as well as affect positively on their stakeholders i.e. their customers,
suppliers, employees, and the community at large. Companies are seeking to become

1
This paper is presented at the Seminar on Good Corporate and Social Governance in Promoting ASEAN’s Regional
Integration, 17 January 2007, Asean Secretariat, Jakarta, Indonesia.
2
Yanti is the Executive Director of Indonesia Business Links (IBL)., a not for profit organization established in 1998
by business leaders in Indonesia to promote/advocate good corporate citizenship among companies and build
partnership for development. Currently supported by 38 companies, IBL is a growing as a Resource Center for
Corporate Citizenship.
 Corporate Social Responsibility in Indonesia
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sustainable by addressing their stakeholders’ welfare and environment protection. Ways of

companies in addressing various social issues in their operating areas, individually or
collectively, are known as Corporate Social Responsibility (CSR).

“Respect for the values of ecological balance, human rights, business ethics and
more sustainable and equitable development are at the heart of strategies for
progress on corporate responsibility throughout the world” (Robert Davies, Founder
CEO of International Business Leaders Forum, 2006).

Many companies in Indonesia (local and international) have proved CSR as a

business case, or that being socially responsible is good for their business. Being socially
responsible can help business to build business sales, quality and reliable workforce, as well
as build trust in the company as a whole.
However, most companies face various challenges of external environment, which
are often difficult or dilemmatic to response. Poor governance is one of main obstacles that
discouraged companies to invest in Indonesia. Even those with high commitment on CSR
wonder how to sustain their meticulous efforts in such a business climate. For example,
should a company provide funds to a government or local authorities where they operate? Do
they need to discount their business principles in order to adopt with local common practice?
In the context of CSR, many of them seek answers on several daunting questions such as:
How can companies benefit from being more socially responsible in a corrupt country like
Indonesia? Should companies give direct contributions to community, or manage the
programme through NGO partners?
Main purpose of this paper is to provide brief overview on the challenges faced by
companies in implementing corporate governance and undertake social investment in
Indonesia. This paper also addresses decisive factors related to internal values and
management system that can help companies responding their problems.

2. CSR PRACTICES IN INDONESIA

The driving force of CSR came from international global movement of business
ethics. Such a term was initially foreign to local companies in Indonesia (including state-
owned companies), although many of them have been doing charitable activities.
Multinational companies operating in Indonesia have been fostering the adoption of CSR
policies deriving from their headquarters after major reports in 1992 on Nike, Levi Strauss
manufacturing plants related to labour and human rights issues. There are several
international initiatives tempted to standardize or provide guidelines to CSR. Among others
are the Sullivan Principles, Global Reporting Initiative, SA8000, and ISO 26000.
In Indonesia, increasing precautious initiatives have emerged, including the
establishment of National Committee on Corporate Governance working mostly on
establishing a Code for Good Corporate Governance, and several corporate forums on CSR

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triggered by various social issues and natural disasters. Because the national guidelines on
community development are patchy and sector-based, multinational companies tend to adopt
international guidelines. The establishment of a not-for profit organization namely Indonesia
Business Links (IBL) in 1998, was a landmark of initiative by prominent business leaders in
Indonesia to promote/advocate good corporate citizenship among companies and build
partnership for development.
CSR must emphasis on sustainability, embracing internal- as well as external-oriented
policies. However, many organizations involved with CSR related activities, tend to adopt it on
“ad-hoc” basis rather than incorporating it into their business strategy. There are also some
notions that CSR is similar to charitable or Community Development activities (PIRAC, 2002),
or seen as tools for avoiding external pressures or public relation gimmicks (BWI, 2006).

Furthermore, the incidents such as the Buyat case (Newmont Minahasa), the Papua
case (Freeport) or most recently the Sidoarjo “hot-mud” case (Lapindo Brantas) opened the
eyes of business leaders and the general public about the importance of CSR. During the
course of a national conference on CSR hosted by IBL in 2006, the participants confirmed
that CSR would become increasingly important to business over the next five years. There is
also strong indication that investment into CSR related activities has increased in 2006. The
area of business ethics and corporate governance is likely to see an increase (Lindgren,
2006).

While various studies looked at the driving force of companies to implement CSR and
problems they are facing, very few discussed on how companies responded to the challenges
accordingly. A study undertaken among natural resources based industry in Indonesia reveals
that companies’ motivation to invest on social development of their surrounding communities
varies, but almost all are claiming similar notions of problems (IBL, 2004). Those challenges
can be categorized as internal problems (within the companies) and external-driven problems
i.e. the external environment which often are outside the control of the companies. The
internal problems include internal management within the companies; many aspects of it are
reflecting the internal values of the companies. The external problems include: (i)
Government related issues, (ii) Customer/Community Behaviour, and (iii) Influence of civil
society organizations.
In one hand, companies who are not willing to share part of their profit for the
community or do not understand the benefit of such social investment to their business
bottom lines, often use parts of the above-mentioned factors as good excuse. Many cases are
visible even without empirical study, where companies undertook quick-fix (“fire-fighting”)
approaches only when they faced challenges from local community, including paying bribes
or breaching ethics.

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On the other hand, companies with genuine willingness to address social needs along
with their corporate values are constrained by the business environment in Indonesia, which
has not been enabling them to comply with their internal values.

3. EXTERNAL ENVIRONMENT AFFECTING CSR IN INDONESIA

 Government sector

Transition to a more democratic and decentralized political system in Indonesia in

early 2000s has contributed to the rise of CSR in Indonesia. Increased democracy has
empowered civil society and allowed it to protest companies considered socially irresponsible.
Decentralization has reduced the level of protection from local protests and demonstrations
that companies previously enjoyed by the central government. It has also placed the power
of negotiating terms of business into the hands of local government officials who are
requiring more from companies in return for access to natural resources and cheap labour. It
is obvious that decentralisation creates additional efforts to develop relations beyond central
government bodies.
Existing regulations in Indonesia cover many aspects of the industrial sector, which
often overlap or are inconsistent between one and another. Decentralization of power to local
governments, combined with corruption and weak law enforcement resulted in additional
administrative costs and bureaucracy. After decentralization was introduced in 2001, power
and authority are more diffused shifting from the centralized corruption version (like during
Soeharto’s era) to a more fragmented bribe collection system. Regulatory goods such as
licence/permit, compliance to environmental regulations, local tax appraisal, and employment
contract inspections create artificial complementary regulations, hence the domain of
corruption and rent seeking behaviour (Kuncoro, 2006). Companies undertaking community
development programmes or CSR activities, experience a similar notion particularly when a
considerable amount of money is involved. The amount of CSR funding remaining after
absorbed along the bureaucracy chain often leaves a very little portion that goes to the
community. In the end, the community feels that the companies never contribute to their
welfare creating an ill feeling or resistant to the company.
Regulatory burden and time spent for negotiating with officials to reduce regulatory
delays attribute to administrative costs of business operations (Kuncoro, 2006). Moreover,
controversial labour issues, brought about through new regulation, discourage businesses to
invest in Indonesia due to lack of clarity on rights and responsibilities (Rees, 2006).
CSR is a voluntary principle, but government is tempted to impose regulation that
would force businesses to comply with CSR principles. This could potentially discourage
companies to pay attention on social issues. IBL’s survey with opinion leaders (2006) has

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shown businesses are willing to go beyond current investment commitments should the
government be willing to provide some reasonable incentives. The business leaders also
believe that investment into CSR would be stimulated should a tax incentive be in place.
While this is applicable in other countries, it is not the case for Indonesia. A multi-sector
group called Masyarakat Pendukung Insentif Pajak (MPIP) is striving to seek government tax
incentives for organizations/companies implementing social investment (MPIP, 2006).

Efforts of creating enabling environment for CSR will not come to fruition unless
Government officials understand various aspects of CSR and the extent of private sector roles
in social development. Companies or NGOs are not replacing government’s roles in providing
basic needs and infrastructure to the community, which are the responsibility of government.

 Consumer and Community Factors

In developed countries like the USA or European countries, customer loyalty on

products reflects to whether or not the company is socially responsible. In Indonesia, there is
lack of survey on consumer perspective upon corporate social responsibility. However,
general observation reveals that the vast majority of Indonesian consumers are very price-
conscious, while paying less attention on “ethical standards” (e.g. eco-labelling, child labour).
This condition does not forge a demand to the producers, particularly the small enterprises
who gain very small profit margins. While 90% of Indonesian economy is driven by
micro/small enterprises, continuous advocacy is needed to promote the bottom-line benefit of
CSR rather than just image gains.
Diversity of local cultures surrounding the operating areas of the companies often
requires considerable time and effort to learn and adapt. At one side, local people often
possess great expectation upon the companies’ helps in various aspects of their life hence
over dependency to the companies. On the other side, there are ill feelings among local
community that “the company has taken the prosperity of their soil, for which the companies
should pay them back”.
Another challenge related to illegal activities around operations (illegal mining, illegal
logging) also creates dilemma for the companies. They are vulnerable to international critics,
but also suffered from physical abuses when they actually try to combat the case.

 Influence of Civil Society

Companies generally tend to work in partnership with NGOs or direct with the
community, rather than with the government (IBL, 2006). While some NGOs are willing to
work with business sector in various social development projects, others are taking opposition
by creating pressures through public opinion damaging on corporate brand and reputation.

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Gaps of perception exist between the Indonesian-based NGO’s about CSR definition.
NGOs often see the vast majority of Business either irresponsible, indulge in green-washing,
sweatshop, or at best only practice philanthropy. They concern about the widening gap
between poor and rich people, particularly those related to natural resources. However, NGOs
need to review their ideological anti-for-profit/business bias and be able to discern between
responsible and irresponsible business.
From the business point of view, perceived barriers to partnerships include low
accountability, lack of familiarity with business contexts and processes, traditional views of
NGO activists on Business either as evil (enemy), or as source of funds.
To bridge these gaps, both business and NGO sectors need to level their discussion
field on poverty issues, equity in partnerships, and foster the disclosure on CSR issues. NGOs
also need to recognize challenges faced by private sector due the lack of pro-Socially
Responsible enabling environment.

4. BUILDING INTERNAL VALUES FOR GOOD CORPORATE CITIZENSHIP

Leading corporate citizens typically balance the economical, social, and ecological
values. Good business practices incorporate the following aspects3:
i). Ensuring honesty and integrity in every aspect of work by acting in good
faith using the organisation's assets only for promoting company policies not
seeking personal gain through abuse of status in the organization;
ii). Providing a fair return to our suppliers of goods and services;
iii). Satisfying clients, including those within the organisation, with the timely
provision of goods and/or services;
iv). Respecting social environment by maintaining an active partnership with the
community;
v). Demonstrating respect for physical environment by adhering to national and
international standards;
vi). Abiding by the laws of Indonesia and those of 'home' country; and
vii). Acknowledging people as the most valuable resource, by respecting human
diversity, providing equal opportunity, and rewarding job performance.
Best practices on CSR usually require strong commitment from the top management,
consistent policy setting and enforcement, good programme development (based on
appropriate assessment of stakeholders needs), accountable programme implementation, and

3
These best business practices were compiled by IBL (2000) from corporate partners. It is currently used as main
reference in promoting good corporate citizenship in Indonesia.

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proper monitoring and reporting (PBSP, 2004) 4. Self-assessment on these parameters should
be conducted on regular basis, in order to improve CSR effectiveness (IBL, 2004a).
Companies in Indonesia are often constrained in implementing CSR, due to: i).
Limited resources with expertise on CSR practices; ii). Company’s structure does not
accommodate CSR function; iii). Local management feels uncomfortable with the term CSR
(translated in Bahasa Indonesia as Tanggung Jawab Sosial), which sounds burdening; iv).
“Quick changing” attitude in CSR implementation when encountered with problems; v). Lack
of focus on CSR areas; and vi) Discrepancies of operational standards between MNCs
headquarters and local offices (IBL, 2004b).
Whether or not those constraints can be addressed depends on the Company’s
intentions to meet minimum obligations or go above/beyond compliance. The following
factors determine the success of implementing CSR practices: i) the intensity of its motives
for being socially responsible; ii) the vision of its leadership at headquarters and locally; and
iii) the time and energy it is willing to spend to understand stakeholder issues (Malkasian,
2004).

Motives for being socially responsible:

Internal reasons refer to the company’s intention to improve its business while
feeling good to be part of community development. Being consistent with corporate vision
and mission, the company also expects some financial benefits. Good image and reputation,
as well as gaining support in implementing operation (social license to operate) are also
common motivations of companies in Indonesia. In addition, some companies embarked their
CSR strategy from their bad experience/failure in the past, where they are still paying the
cost of it to date (IBL, 2004). Real cases of Freeport reveal that financial commitment shows
high motivation, but not necessarily reflect commitment to sustainability (Malkasian, 2004)
In the context of corporate vision and mission, most of multinational companies set
clear purposes and values manifested in their Business Principles or Codes of Ethics.
Nevertheless, many scholars argue that such Code of Ethics would determine the success of
CSR practices, unless they consistently implement the Code through continuous internal
enforcement (Kemp, 2001).
In such country where corruption is strongly endemic, the companies should stand
firmly on their principles to “say no” to corruption. While this is not always easy, several
companies see that collective action can amplify the power to promote corporate governance.
An example is the Business Ethics programme conducted by IBL, where collectively IBL’s
corporate partners promote compliance to the Indonesian Anti-Corruption Laws through
interactive workshops in collaboration with the Indonesian Corruption Eradication Committee

4
PBSP (The Philippines Business for Social Progress) has developed well-tested tools for CSR benchmarking. These
tools, comprising of internal system self-assessment and stakeholder rating assessment, have been adopted in
Indonesia by Indonesia Business Links in collaboration with PBSP.

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(KPK = Komite Pemberantasan Korupsi). The supporting companies utilize this programme to
“educate” their business partners and stakeholders behaving to ethical standards in line with
their corporate codes of conducts. Such workshops discussed various issues related to
facilitating payments. This topic is often regarded as the “grey-areas”.
Genuine motivation of CSR starts from the individual values of the corporate
employees. Individual mindsets should shift from being self-interest to be self- and others-
interests. Employees should use their “heart” with multi-perspective awareness, and not
merely dictated by “mind” and the job structure. Care-base moral reasoning and emotional
maturity are also very important values needed by leading corporate citizens (Waddock,
2006).

Leadership in CSR:

Most of multinational companies have mandates from their headquarters to operate

in good manners and to assist in local development by understanding and interacting
constructively with their local communities. In undertaking such development roles, they
must apply principles of mutual respect, active partnership, and long-haul commitment.
Whether or not the local office properly carries these out depends on the quality of local
leaders. The CEO or leadership of the top management at the local level plays very important
roles in championing CSR by behaving in ways that are consistent with the company’s
principles, values, and purposes, and are responsive to the expectations of its various
stakeholders. Corporate leaders must convince their internal publics that the company’s
economic viability goes hand in hand with the social and environmental benefits it owes to
the communities where it operates.
Without support of the CEOs, working level managers find it difficult to coordinate
with their peer colleagues for CSR implementation. CSR requires commitment, long-term
thinking and vision from business managers. PBSP’s tools on CSR benchmarking rated high
the CEOs who: 1). champion actively the CSR principles and values, 2). set, support and
commit to CSR goals and objectives, 3) lead in defining CSR performance indicators or
benchmarks, 4) assures congruence between CSR policy and practice, and 5) assumes full
accountability to the policy and impacts.
Internal management of the company must support the CEOs policies on CSR, in line
with improvement of skills among the employees. Depending on the level of external
pressure the company is experiencing, a community relations department should be included
in corporate structure. Placing somebody with great experience on local indigenous people,
speak local languages might help in earlier stage, but greater understanding on social issues
and how to address them are more essential. The community relations department should
also gain endorsement from other departments.

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Understanding stakeholder issues:

Conscientious effort to provide good services allows reciprocal and productive

relationship between companies and their stakeholders. Corporate managers should be able
to keep customers and remain competitive, because when customers/clients believe they
have more options available to them, it is most likely that they less value their relationship
with the company (Alexander et al, 2005).
Consumer survey in America shows that most people want companies to focus more
than just profitability, while almost half of the respondents respond negatively to companies
that are perceived as not socially responsible (BSR, 2002).
Understanding surrounding communities is very crucial for companies, particularly
those operating in remote areas, in the areas of mining, oil/gas, forestry, or other natural
resources related industries. Companies believed that money and codes of conduct (or their
equivalent) could achieve good community relations, which is irrelevant for today’s context.

“….overseas oil and gas companies often ignored issues of local culture and the need
to take a social or community development approach. The tensions between
communities and mining companies could not be resolved by a code of conduct
unless there was a genuine intent to respect local cultural values…..” (Kemp,
2001:31).

Common phenomenon of attacks to companies by NGOs or public activists, are often

due to bad communications. Real cases in Indonesia suggest that social responsibility should
by no means involve public denial, political manoeuvres, or intimidation of the victims (Walhi,
2006).
Effective communication can be carried out through publication, dialogues, and other
interactive modes. Effective public relation strategy and regular interactions with stakeholders
can help building the trust towards the company’s genuine intentions. Transparency and
willingness to open up the facts are essential factors of internal values, bridging the gap of
communication with stakeholders. Involvement of academic institutions in research and
development is legitimate and meaningful, while giving scientific inputs to the entire context.

5. CONCLUSION

Nowadays, value creation on triple bottom line (profit, people, and planet) is very
fundamental to the concept of CSR. However, the process of improving corporate social and
environmental performance undoubtedly encompasses broader cultural and societal change,
which after 35 years of business culture during the Suharto’s era; it is difficult to expect that
things will change overnight. Multi-dimensional problems including corruption, disasters, and

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threats on disintegration, add on as factors affecting the acceptance of CSR in the Indonesian
context.
While many companies are sincerely making efforts to implement good CSR
practices, there are allegations that CSR is “cosmetics” or to gain legitimacy that can
influence public opinion about the company. Companies that are merely seeking profit, find
the voluntary nature of CSR coupled with the weak law enforcement upon ethical misconduct
in Indonesia, as a reason for avoidance. On the other hand, companies that are genuinely
endeavouring social justice find this situation very frustrating. No matter how big they
financially contribute to the social development, there are protests, boycott, or physical
threats, leaving the companies in real dilemmas. Lessons learned of major companies in
Indonesia, due to the “quick fix” attitudes, have cost them continuous resentment by grieved
parties.
Several barriers prevent businesses from fully implementing CSR, driven from the
external environment as well as the internal system. Lack of understanding about CSR
definition is a primary barrier to build understanding between business, government, and civil
society. There is a real need of continuous efforts to educate and train business leaders,
employees and other stakeholders.
External barriers generally include government related factors (legislation, tax, and
governance), customer and community behaviour, and the influence of civil society
organisations. On the other hand, companies also face internal problems including limited
CSR expertise, unsupportive local management structure and attitude, as well as difficulties in
adopting operational standards as mandated by their headquarters.
Building strong internal system rooted from good corporate values and social justice
orientation, is an essential step to respond to those challenges towards good CSR practices.
Good companies respect their shareholders, empower or share power with appropriate
stakeholders, endorse equal partnership, prefer collaboration other than exclusivity, and
network/link with other like-minded companies. Top management should support and
champion CSR policies through intense- and long haul commitment. Strong internal
management system can build good CSR programme implemented by employees with social
awareness and caring mentality. Finally, good understanding of stakeholders’ issues through
effective communications can help companies in strengthening their CSR practices.

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