Violations of Good Corporate Governance Principles: Analysis of a

Case Study

Elizabeth Hotmaulitua and Desi Adhariani

Department of Accounting, Faculty of Economics and Business, Universitas Indonesia

Keywords: Corporate Governance, Violations, Case Study

Abstract: This study presents a case study on violations of several good corporate governance principles with the aim

to become a source of learning for practical as well as academic purposes. The case study shows a lousy

practice of business ethics conducted by a big mining company in Indonesia, which brings social and

environmental detrimental effect on the local community and environment. The bad impact implies the

importance of good corporate governance implementation to support ethical business practices and the

sustainability of a company. Apart from the practical implication, this study also has the implication on future

research to explore more on the relationship between business ethics and corporate governance in the case

study context to enable a deep understanding of the issue.

1 INTRODUCTION

Indonesia is country rich in natural resources, ranging

from gold, coal, silver, to copper. The natural wealth

is spread in various regions, from Sabang to

Merauke. This natural wealth is one of the things that

Indonesia can be proud of to the world. However,

these natural resources cannot be renewed, so that if

they are not appropriately managed, they

will eventually run out. Indonesia's abundant natural

wealth has also made many foreign companies

interested in cooperating with the Indonesian

government. This study focusses on the analysis of a

multinational mining company in Indonesia, namely

PT DEF.

Multinational companies operating in a country

should always follow the rules and

regulations. Therefore, there is a need for

legislation or regulations that govern the cooperative

relations of multinational companies with countries

where companies operate to protect the interests of

both parties. It is also needed to create an atmosphere

of harmony and cooperation that is mutually

beneficial. The main legal bases and sources relating

to multinational companies in Indonesia are found in

two regulations, namely Law Number 40 of 2007

concerning Limited Liability Companies (hereinafter

referred to as the Company Law) and Foreign

Capital Protection Law No. 1 of 1967 (hereinafter

referred to as UUPMA) with all rules for its

implementation.

Multinational companies have properties,

characteristics, and activities that cross-national

boundaries, so the law of multinational companies

other than those in domestic law in each country

where the multinational company operates is also

influenced by international law. Based on the

provisions of the law of multinational corporations

regulated by the Code of Conduct on

Transnational Corporation (ECOSOC- PBB) and the

declaration of new international economic order (UN)

which states that legal delegations from the

international community to each state have the

authority to regulate the activities of transnational

companies in the area that has become its jurisdiction,

the PMA Law No. 1 of 1967 was made a legal source

of multinational companies in Indonesia.

One reason for the vulnerability of companies in

Indonesia to economic turmoil is due to the weak

implementation of good corporate governance.

Before the crisis period, the term corporate

governance was rarely discussed or known in

Indonesia. But then issues regarding the

implementation of corporate governance began to be

taken into account and considered essential in order

to support the recovery of the economy due to the

crisis. Good Corporate Governance (GCG) is a

concept that concerns structure company, a division

of tasks, division of authority, division of

Hotmaulitua, E. and Adhariani, D.

Violations of Good Corporate Governance Principles: Analysis of a Case Study.

DOI: 10.5220/0009399300300039

In Proceedings of the 1st International Conference on Anti-Corruption and Integrity (ICOACI 2019), pages 30-39

ISBN: 978-989-758-461-9

responsibility for each element of the company's

structure or company. Good

Corporate Principles Governance is regulated in the

General Guidelines for Good Corporate Governance

issued by The National Committee on Governance

Policy (KNKG) in 2006 consisted of five principles,

namely Transparency (Transparency), Accountability

(Accountability), Responsibility (Accountability),

Independence (Independence), and Fairness

(Fairness).

The occurrence of violations of regulations by

multinational companies in Indonesia is assumed to

be due to several reasons, namely the wrongdoing of

the perpetrator, the weakness of the apparatus which

includes integrity and professionalism, as well as

deficiencies in the regulations. The UUPMA

provides administrative sanctions for violations

committed by foreign investors who violate the

contract. Provisions for other sanctions are found

in Law No. 25 of 2007 article 34 concerning

Investment related to violations from foreign

investors concerned is seen/studied casually, for

example foreign investors violate matters that are

prohibited in the mining sector, then the investment

or will be subject to sanctions based on laws and

regulations - invitation related to mining so that the

violator can be subject to administrative, criminal and

civil sanctions in accordance with the violations

committed.

During its operations, PT DEF in running its

business several times, violated the provisions of

regulations in Indonesia. Some of these violations

generally relate to aspects of Good Corporate

Governance, business ethics, and corporate social

responsibility. Some examples of cases include PT

DEF discriminating salaries/wages for workers,

recording a series of environmental and human rights

violations, violating work contracts that have been

agreed with the Indonesian Government, violating

the law, avoiding tax obligations, and so on. As a

result of the violations committed, Indonesia as the

country where PT DEF operates and its people suffer

significant losses.

2 LITERATURE REVIEW

2.1 Theory of Good Corporate

Governance

In the basic principle of the General Guidelines for

Good Corporate Governance issued by KNKG in

2006, Good Corporate Governance (GCG) is needed

to encourage the creation of an efficient, transparent

and consistent market with legislation. Therefore, the

application of GCG needs to be supported by three

interconnected pillars, namely the state and its

instruments as regulators, the business world as

market players, and the community as users of

business products and services. The basic principles

that must be implemented by each pillar are:

a. The state and its instruments create laws and

regulations that support a healthy, efficient, and

transparent business climate, perform

legislation and law enforcement consistently

(consistent law).

b. The business world as a market participant

applies GCG as a basic guideline for

conducting business.

c. The community as users of the products and

services of the business and the parties affected

by the existence of the company, show concern,

and conduct social control (social

control) objectively and responsibly.

Every company must ensure that the GCG

principle is applied to every business and in all levels

of the company. GCG principles of transparency,

accountability, responsibility, independence, and

fairness are needed to achieve the sustainability of the

company with regard to their stakeholders.

1.Transparency (Transparency)

To maintain objectivity in conducting business,

companies must provide material and relevant

information in a way that is easily accessible and

understood by stakeholders. The company must take

the initiative to disclose not only the problems

required by laws and regulations but also important

matters for decision making by shareholders,

creditors, and other stakeholders.

2. Accountability (Accountability)

Companies must be able to account for their

performance transparently and fairly. For this reason,

the company must be managed properly, measured,

and in accordance with the interests of the company

while taking into account the interests of

shareholders and other stakeholders. Accountability

is a prerequisite needed to achieve sustainable

performance.

3. Responsibility (CSR)

Companies must comply with laws and

regulations and carry out responsibility for society

and the environment so that long-term business

continuity can be maintained and recognized as a

good corporate citizen.

4. Independence

To facilitate the implementation of the GCG

principle, companies must be managed independently

Violations of Good Corporate Governance Principles: Analysis of a Case Study

so that each company organ does not dominate each

other and cannot be intervened by other parties.

5. Fairness and Equality

In carrying out its activities, companies must

always pay attention to the interests of shareholders

and other stakeholders based on the principle of

fairness and equality.

2.2 Theory of Business Ethics

In the basic principle of the General Guidelines

for Good Corporate Governance issued by the

KNKG in 2006, to achieve success in the long term,

the implementation of GCG needs to be based on high

integrity. Therefore, behavioral guidelines are needed

that can be a reference for the organ of the company

and all employees in applying business values and

ethics so that they become part of the corporate

culture. The basic principles that must be owned by

the company include:

a. Every company must have company values that

describe the company's moral attitude in

carrying out its business.

b. To be able to realize a moral attitude in carrying

out its business, the company must have a

business ethics formula agreed upon by the

organ of the company and all employees. The

implementation of sustainable business ethics

will shape the corporate culture, which is a

manifestation of corporate values.

c. The values and formulation of the company's

business ethics need to be outlined and further

elaborated in the behavioral guidelines so that

they can be understood and applied.

In the main guideline for implementation,

company values are a moral foundation in achieving

the company's vision and mission. Therefore, before

formulating company values, it is necessary to

formulate the company's vision and

mission. Although company values are universal, in

formulating them, they need to be adjusted with the

business sector and the character and geographical

location of each company. Universal corporate values

include trustworthiness, fairness, and honesty.

Business ethics is a reference for companies in

carrying out business activities, including interacting

with stakeholders. The continuous application of

corporate values and business ethics supports the

creation of corporate culture. Every company must

have a business ethics formula that is mutually agreed

upon and further assessed in the code of conduct.

Furthermore, the behavioral guidelines are the

elaboration of company values and business ethics in

carrying out the business so that they become a guide

for company organs and all company employees. The

Code of Conduct includes guidance on conflicts of

interest, giving and receiving gifts and donations,

compliance with regulations, the confidentiality of

information, and reporting on unethical behavior.

According to Simanjuntak (2005), business ethics

concerns the appropriateness of the behavior of all

parties directly related to the activities of a

company. Furthermore, according to Sukarman

(2007), ethical behavior is not just a momentary

action but must be a habit. Therefore, the process of

fostering an ethical culture in companies is a

continuous effort. Meanwhile, according to

Reksodiputro (2004), business ethics is based on

values that go beyond the rules or norms

(regulations).

Keraf (1998) explains that there are five principles

of business ethics. First, the principle of autonomy,

namely the attitude and ability of humans to make

decisions and act on their awareness of what they

consider good to do. Second, the principle of

honesty. Honesty in doing business is the key to

success, including staying in the long term, in a

business environment full of intense competition.

Third, the principle of justice. The principle of justice

requires that everyone in business activities, both

external relations and internal relations of the

company, be treated according to their respective

rights. Justice requires that in business activities,

there must be no party whose rights and interests are

harmed. The fourth principle, mutual benefit. This

principle requires that the business is run in a way that

benefits all parties. The fifth principle, moral

integrity. This principle is mainly lived out as an

internal demand in the business person or company to

run a business while maintaining the good name or

good name of the company.

2.3 Theory of Corporate Social

Responsibility

Corporate social responsibility (CSR) is decision

making that is associated with ethical values, fulfills

legal rules and decisions, and respects people,

society, and the environment (Djogo, 2005). With the

increasing role of the private sector through free

markets, privatization, and globalization, the broader

interactions, and responsibilities of companies,

including in terms of CSR.

According to Reksodiputro (2004), the concept of

CSR is in line with the concept of Good Corporate

Governance (GCG) and the concept of business

ethics. According to Wienerberg Reksodiputro

(2004), CSR more based on value-based and focused

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on external companies. CSR is aimed at broader

stakeholders, including consumers, non-

governmental organizations (NGOs), suppliers, and

communities. Thus, management not only pays

attention to the basic aspects of economic standards,

but also on aspects of the impact of company

activities on the environment, surrounding

communities, and society in general.

The company's social responsibility according to

Utama (2007) is based on all relationships, not only

with the community but also with customers,

employees, communities, owners, government,

suppliers, even competitors. One form of corporate

social responsibility in community development.

Companies that put forward the concept

of community development emphasize social

development and capacity building society. A similar

opinion was conveyed by Djogo (2005), who stated

that CSR concerns social development issues (social

development) and is carried out in the context

of partnership and governance. This CSR principle

pays attention to the development community,

protection and preservation of the environment for

environmental sustainability, and help improve the

quality of human life.

According to the World Bank Djogo (2005),

corporate social responsibility consists of several

main components. These components are

environmental protection, job security, human rights

(HAM), interaction and involvement of the company

with the community, business standards, markets,

economic development and business entities, health

protection, leadership and education, and

humanitarian disaster assistance.

Harahap (2007), states that until now, there has

been no single understanding of CSR. If the red

thread is drawn, CSR is part of the corporate business

strategy that is related to business continuity in the

long run. The business philosophy developed since

the beginning should be that the corporation is an

integral part of the surrounding community.

Conversely, the community is an integral part of the

corporation. For this reason, harmony and harmony is

needed between the corporation and the surrounding

community so that they are mutually beneficial

(symbiotic mutualism).

According to Keraf (1998), corporate social

responsibility shows the company's concern for the

interests of other parties more broadly than just facing

the interests of the company. There are four fields

included in the scope of CSR. First, the involvement

of companies in social activities that are useful for the

benefit of the wider community. Second, economic

benefits. Every business actor, including a company,

is morally justified in pursuing profits because he can

thus sustain the business and company. Social

involvement as a manifestation of the company's

responsibility and concern for the progress of the

community will create a positive image about the

company and make the community more accepting

the presence and products of the company. Third,

fulfilling the legal rules that apply in a society.

Companies must maintain order and social order.

Fourth, respect for the rights and interests of

stakeholders who have a direct or indirect interest in

the company's business activities.

The Millennium Poll Survey on CSR (1999)

conducted by Environics International (Toronto), The

Conference Board (New York), and the Prince of

Wales Business Leaders Forum (London) of 25,000

respondents in 23 countries on six continents. The

survey results show that 1) half of the respondents

care about the company's social behaviour; 2) two-

thirds of respondents stated that 60% of the

company's profitability was determined by the

application of business ethics, employee practices,

environmental impact, and corporate social

responsibility (CSR), only 40% was determined by

the company's image and brand image; and 3) only

one third underlies his opinion on fundamental

business factors such as finance, company size,

corporate strategy, or management (Hasibuan and

Sedyono, 2002).

Another survey conducted in 2000 by Burson

Marsteller showed that 42% of respondents believe

that the track record of CSR will increase stock prices

and 89% say that their decisions as legislators,

regulators, journalists, and NGOs in the future will be

influenced by CSR issues. Customers, investors,

community groups, environmental activists, and

trading partners will ask the company for detailed

information about their social performance.

At present, the concept of corporate social

responsibility (CSR) is part of the guideline for

implementing good corporate governance (GCG).

The problem of business ethics and business

accountability is increasingly gaining public

attention, especially in developed countries, which

are usually very liberal in regulating companies

(Reksodiputro, 2004).

3 COMPANY PROFILE AND

RESEARCH METHOD

PT DEF mines, processes and explores ore containing

copper, gold, and silver. Operates in highland areas in

Violations of Good Corporate Governance Principles: Analysis of a Case Study

Mimika Regency, Papua Province, Indonesia, its

markets concentrate containing copper, gold, and

silver throughout the world. DEF’s mining complex

in Grasberg is one of the largest producers of gold and

gold in the world and contains the largest copper

reserves that can be taken in the world, in addition to

the single largest gold reserve in the world. Grasberg

is in the heart of a vast mineral area, where continuing

exploration activities provide opportunities to

continue to add to DEF’s long-standing reserves.

PT DEF is one of the largest copper mining

companies from mineral seeds which also contain

large amounts of gold. The first Contract of Work

(KK) with the Government of Indonesia was carried

out in April 1967, and exploration activities on

Etsberg began in December 1967. Construction on a

large scale started in May 1970, while the first export

of copper concentrate was carried out in December

1972. In late 1991, the second KK was signed, and PT

DEF was granted the right by the Indonesian

Government to continue its operations for at least the

next 30 years. This means that until 2021 PT DEF still

had concession rights in Papua. Copper products

originating from the mining complex in Papua as well

as copper products from the smelting factory in

Gresik, which is 25% owned by PT DEF, are very

important materials for the communications,

transportation, electronics and other industries that

are the mainstay of the world.

This study uses a case study method with data

sources from published materials regarding PT DEF.

The violations were structured by comparing them

with the principles of good corporate governance.

The constant comparative method is expected to

provide a complete picture of violations to enhance

more ethical business conduct in the future. We

considered that the use of secondary sources is

adequate to study the issue as they can provide the

objective point of view compared to interviews or

other primary sources.

4 VIOLATIONS OF THE

PRINCIPLES OF GOOD

CORPORATE GOVERNANCE

4.1 Wage / Salary and Employee

Discrimination

Almost all PT DEF workers carried out a strike

caused by differences in the salary standard index

applied by management to the company's operations

in Indonesia and other countries throughout the

world. DEF workers in Indonesia are known to get

lower salaries than the counterpart workers in other

countries for the same level of office. In 2017, the

hourly salary of workers in Indonesia was USD 1.5-

USD 3. According to information from the Ministry

of Energy and Mineral Resources, the wages obtained

by DEF employees are only equivalent to the UMR

or Rp. 3.3 million. When compared to the hourly

salaries of workers in other countries it reaches USD

15-USD 35. So far, negotiations on this issue have not

yet come out, and the management has insisted on

rejecting demands from workers. In addition to the

minimum salary or wages provided, the proportion of

workers in DEF is also uneven among local Papuan

workers with foreign workers. Based on information

received, there were only 4,000 employees from

12,000 DEF employees. In general, local employees

are employed at the lowest level of office, in contrast

to foreign workers who tend to fill positions at a

higher level.

4.2 Environmental Pollution and

Human Rights Violations

According to Wahyuni (2007), although the

Indonesian mining sector is considered to be very

geologically perspective, the policies taken by the

government have not supported the mining industry

sector. It has been almost fifty years that the mineral

mining industry in Indonesia has failed to prove its

role as a pillar of the Indonesian economy, let alone

the welfare of the local population where the minerals

are mined. The mining sector also failed to

demonstrate their responsibility for environmental

damage, human rights violations, and the resolution

of conflicts with local residents in mining locations.

In carrying out its operations, PT DEF tends to

expose its profits economically and ignore the

environmental impacts caused. Jatam noted a series

of environmental and human rights violations

committed by DEF. Widianto (2006) stated that PTFI

failed to show its responsibility for environmental

management and to realize conflict resolution with

local residents. The company is accused of poisoning

rivers, estuaries and the sea in Mimika Regency with

waste containing mercury and cyanide. The five

affected rivers, namely Aghawagon, Otomana,

Ajkwa, Minajerwi, and Aimoe, were used as a place

for deposition of mine waste (tailings).

Approximately 1.3 billion tons of tailings and 3.6 tons

of new waste are disposed of in the environment.

Moreover, DEF disposes of any hazardous liquids

which are materials in the metal separation process

which of course will be very dangerous if the waste is

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discharged directly into nature which is a water

animal habitat and also the source of clean water for

human needs will be lost. Recorded water content

where DEF disposes of concentrated waste by

poisons reaches chronic levels and threatens about

75% of freshwater organisms that live in it.

DEF also conducts expansion of dikes in the west

and east to the south because the tailings flow is out

of control. This waste threatens the new river, namely

Tipuka, and causes the breakdown of Lake Wanagon

to contaminate hundreds of thousands of hectares of

land and sea of Arafura. The local community there

continues to speak out, but their complaints and

protests have never been heard, let alone involved in

negotiations.

The impact that PTFI has on the area surrounding

mining is quite alarming. According to Reza (2006),

physical environmental damage that occurs in Papua,

among others in the form of rivers that become the

flow of waste disposal companies have been

contaminated with toxic substances, the land around

230 square kilometers damaged, and deforestation in

the area around the miners are increasingly

expanding. These things certainly violate

Government Regulation No. 82 of 2002 concerning

environmental pollution. According to the BPK, the

total potential environmental losses incurred reached

Rp. 185 Trillion until 2017.

Another violation case of DEF mining is when

Amungme residents were evacuated from their

ancestral lands once mineral deposits were

discovered on their land. Fauzia (2006) explained that

the demonstration against DEF, which finally broke

down and resulted in the death toll was an emotional

overflow of the community. Riots and

demonstrations did not appear without any trigger

factors behind them, namely social inequality and

feelings of injustice.

Later, Jatam also found allegations of refusing to

pay water taxes land that DEF should have deposited

with the Mimika Regency Government. PT DEF

refusal was triggered by the uncertainty of the central

and regional governments in collecting payment for

losses, plus the government which could be easily

negotiated by the company.

4.3 Contract of Work (Indenture)

The second Contract of Work (Kontrak Karya) signed

in 1991 in the last few times has led to various

controversies. The Indonesian House of

Representatives considers the KK with PT DEF to be

revised because the government has not yet received

the maximum benefits from the copper and gold

mining project in Papua. The distribution of royalties

between PT DEF and the Indonesian government

must be renegotiated. The proposal was made

following the findings of the Financial Audit Agency

(BPK), which stated that the preparation of KKPTFI

could potentially harm the country. The Plenary

Session of the Indonesian Muslim Intellectuals

Association (ICMI) meeting also recommended the

government to look for new cooperation

formulations and fulfill a sense of justice for all

parties (ICMI, 2006). Basic considerations because

the current conditions have changed far from the

past. The issue of corporate social responsibility and

the balance sheet of natural resources needs to be

discussed by the government so that it encourages as

much as possible the results of these natural resources

to be allocated to the prosperity of the nation and the

State.

DEF violates the Contract of Work agreed upon

with the Government of Indonesia. The violations of

the contract of work that DEF has done are: (1) In

February 2017, DEF was declared to have violated

the Contract of Work in article 24. Where DEF should

be subjected to the obligation to divest shares, the fact

is that it was not implemented; (2) In this case PT

DEF acts to the government, which is not willing to

change the Contract of Work into an IUPK (Special

Mining Business License). This happened because it

was in accordance with Law No. 4 of 2009

concerning minerals and coal where

The origin of 170 Mining Laws states that mining

companies holding a Contract of Work are required

to carry out refining and processing of their mines in

the country before being exported within five years of

the legalization of the Law. This means that PT DEF

is given a 5-year term to build a smelter. So, in 2014,

PT DEF should have been purifying its mining

products in Indonesia so that it could still carry out its

export activities. However, DEF ignored this

regulation, where PT DEF did not make a smelter as

stipulated in the Act. Here PT DEF has clearly

violated the legal ethics prevailing in the Indonesian

state according to the mandate that every company

operating in Indonesia must follow the applicable law

in the country of Indonesia; (3) In accordance with

government regulation No.1 2017 concerning the

implementation of mining business activities the

government has kindly given the IUPK to PT DEF so

that PT DEF can operate again, but DEF must comply

with the applicable IUPK regulations, but in this case

DEF instead refused and still wanted the KK to take

effect. DEF also threatened the government by

bringing the matter to the International Arbitrage

Court.

Violations of Good Corporate Governance Principles: Analysis of a Case Study

4.4 Violation of Law

According to the BPK, DEFviolated the use of a

protected forest area of 4,535.93 hectares. DEF has

been declared not pocketing the use of pin -

hour licenses in 2008-2015. This mining activity

violates Law Number 41 of 1999 and Law Number

19 of 2004 concerning Forestry. The state loses non-

tax state revenues from the use of forest areas —

potential state losses of Rp 270 billion.

The BPK also found the excess of the reclamation

guarantee disbursement amounting to the US $ 1.43

million or Rp. 19.4 billion based on Bank Indonesia's

middle exchange rate on May 25, 2016. The BPK

assessed that the funds should still be placed in the

government. The BPK also found that the counts of

the Ministry of Energy and Mineral Resources

Directorate General of Mineral and Coal supervisors

were inconsistent, and the results of the assessments

were inaccurate. There was also a discrepancy in the

reclamation report with facts in the field.

According to the BPK, DEF also mines

underground without environmental

permits. Analysis of DEF’s environmental

impacts s since 1997 did not cover underground

mines. Besides that, DEF has not deposited post-

mining fund obligations in the 2016 period to the

government. The state's potential loss is the US $

22.29 million or around Rp. 293 billion.

5 CASE DISCUSSION

Business competition in the past few times can be

categorized as a battle of formation and safeguarding

of images in the eyes of consumers or the general

public. Companies can be superior by establishing a

corporate image that is environmentally friendly and

has social sensitivity. Another advantage, with a safe

and harmonious business situation and conditions

with the surrounding residents, makes the company

able to run its business properly. The implementation

of a business, including mining, will have an impact

on the community. The impact received by the

community will be determined by the company's

ability to manage its business.

There are many parties who believe that the

application of corporate governance is still

inadequate, especially in providing information to the

outside world. Though it is believed that corporate

governance has an important role in creating a stable

market. Kormen (2007) wrote that the results of the

IICD research (The Indonesian Institute for Corporate

Directorship) showed that the implementation of

good corporate governance in the company would

spur the growth of the company. The implementation

of good corporate governance internally will bring

companies to become better-performing companies

in the future.

Besides being important for corporate

sustainability internally, GCG also needs to be

implemented to build good relationships with

external parties. Every multinational company

operating in a country should always follow the rules

set by the country itself. There needs to be a law or

regulation that regulates the position of multinational

companies to protect the interests of both and for the

creation of an atmosphere of harmony and mutually

beneficial cooperation.

In practice, DEF in running its operations, tends

not to reflect the principles of GCG. The problems

that occur are based on the incompatibility of salaries

and wages of Indonesian workers who, when

compared to workers from other countries, have very

different levels. DEFworkers' salaries are limited to

regional minimum wages (UMR). Even though it is

said that it is not illegal, the salary provided is far

from what is imagined. In addition to the minimum

salary or wages provided, workers in the United

States (US) mining company also have an unequal

proportion between local native Papuan workers and

foreign workers. And ironically, local workers are

generally employed at the lowest level, unlike foreign

workers who are usually placed at the top level.

Besides that, there was a discovery regarding the

mismatch of the person with the facts in the field

found by the BPK. The calculation of losses for the

environmental impact of the operation of the DEF

mine by a supervisory team from the Ministry of

Energy and Mineral Resources and the Ministry of

Environment and Forestry has been inaccurate. Thus,

the BPK team reviewed the report and found several

irregularities such as the excess of the DEF

reclamation guarantee disbursement, actual state

losses, and so on. DEF has also done too many

violations of contracts. Do not stop at the above

problems; there are still many more violations

committed by DEF, especially environmental

violations that make the Papuan people suffer.

From the explanation above, it can be concluded

that DEF has done a lot of negligence and violated the

principles of GCG. DEF, which treats local workers

unfitly, such as differences in salaries and wages,

placement of positions in the company, is one of the

violations of the principles of GCG, especially the

principle of Justice. In addition, DEF also damaged

the Papuan environment and made the Papuan people

suffer. DEF also does not carry out its responsibility

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to pay taxes to the local government. This can be

interpreted that this company also violates the

Principle of Responsibility.

Not only stop there, but there are also still

violations committed by DEF, which often violate

regulations or laws on the grounds of a Contract of

Work. DEF is also brave enough to carry out

underground mining without environmental permits,

does not pay taxes, also lacks transparency with the

government until it is found that there are errors in

calculating state losses that cause the state to lose.

This shows that DEF also violates the principle of

accountability and transparency, as indicated by the

lack of openness and accuracy of information.

The social and environmental impacts caused

during the mining activities that have been going on

for 50 years have been large so that there were

requests from several parties to close the mining

business. This means that the management of PTFI is

not good because of the many comments that indicate

community dissatisfaction. The root of the problem

with community dissatisfaction seems to be because

PTFI lacks information disclosure to the public. Due

to information that is not open, such distrust arises.

As mentioned in the previous section, in the PTFI

report on the Elements of Sustainable Development

(2006), the data presented did not reveal clearly and

transparently the actual business activities of PTFI.

The benefits of PTFI have also not been revealed for

the Indonesian people in general, and the Papuan

people in particular.

6 CONCLUSIONS AND

SUGGESTIONS

6.1 Conclusions

Compliance with the principles of Good Corporate

Governance (GCG) and attention to business ethics is

a must-have in the company because it provides a

reference so that it can run the company's operations

in accordance with state regulations while

maintaining a friendly relationship with the

surrounding environment including social and

natural. But in reality, PT DEF actually carried out

various violations openly.

According to KNKG (2006), in carrying out the

principles of Good Corporate e-Governance (GCG),

it needs to be supported by three interconnected

pillars, namely the state and its instruments as

regulators, business as market players, and the public

as users of business products and services. In the state

pillar, the firmness of the government is questionable

because the government is considered as contributing

to legalizing DEF's influence on the Indonesian land

of Papua which has seen more damage and it seems

as if the government has the ability to revoke PT

DEF's operating licenses apathetic. In the pillar of the

business world, namely DEF as a market player, DEF

is considered to apply still the old paradigm where the

company only prioritizes profit as much as possible

without considering the condition and its relationship

with the internal and external parties of the company.

Examples of violations of GCG principles for internal

companies are salary discrimination that violates the

principle of justice and violates the principle of

fairness in business ethics which states that every

person in business activities, both in the company's

external relations and internal relations, must be

treated according to their respective rights whereas

examples of violations of GCG principles for external

companies are violations of state regulations,

environmental destruction, human rights violations,

and others, where this is also related to the third pillar,

namely the community, where the population is far

from the word prosperity which is not comparable to

the income or appraisal of PT DEF which is

considered fantastic so that residents should not enjoy

the results as a form of corporate responsibility and

concern for their social environment.

6.2 Suggestions

As explained by the political lecturer at Cenderawasih

University, Marinus Yaung, the impact of PT DEF's

mining exploitation on humans and nature in Papua

has been going on for almost 50 years. Through

Government Regulation No. 1 of 2017, the

government requires every farmer company to

change its status from a Contract of Work to an IUPK

if it still wants to export minerals in the form of

concentrates. Although DEF McMoran's President

and CEO, Richard Adkerson, insisted on following

the Contract of Work as stipulated in the 2009 Law

on Mineral and Coal Mining, the government must

act firmly on established regulations. Dissent between

the government and DEF made the company from the

United States threaten to sue the Indonesian

government through international arbitration if it still

obliged to change the status to IUPK. Lawyers for

natural resources law, Ahmad Redi, said that if this

issue is brought to the arbitration track, the

government is in a stronger position because

environmental issues are becoming a world concern.

However, the Indonesian Chamber of Commerce

and Industry (Kadin) has asked the government and

Violations of Good Corporate Governance Principles: Analysis of a Case Study

PT DEF to resolve the problems that are currently

happening wisely. Indonesian Chamber of Commerce

and Industry Chairman, Rosan P. Roslani, hopes that

solving problems between Indonesia and DEF does

not end through an Arbitration process. Arbitration is

considered to be detrimental to all parties because it

will take time and energy. Not only that, the

arbitration process, according to Rosan, will also be

of enormous use. This is reflected in several cases that

Indonesia has faced through arbitration.

After conducting discussions and negotiations

between the two parties, in January 2017, ESDM

Minister Ignasius Jonan announced that the

Indonesian government would provide concessions to

export raw minerals with several requirements

through PP No. 1 of 2017. There are three

requirements that must be fulfilled so that mining

companies can export minerals in the form of

concentrates. First, the threshold company that has a

Contract of Work must change its permit m become a

Special Mining Permit (IUPK) if you want to export

in the form of mineral concentrates. IUPK is valid for

five years and can be extended, a maximum of two

times. Second, mining companies that have an IUPK

must build a smelter within five years. The

government will conduct an evaluation every six

months to check the development of the smelter

construction. And third, mining companies are also

obliged to divest up to 51% gradually within ten

years.

Because of that, with the issuance of an agreement

between the two parties, the government must firmly

maintain the stipulated regulations and oversee DEF's

compliance with the regulation. This aims to prevent

violations that might occur in the future. And if later

there are violations committed by the company, the

government is expected to be able to follow up fairly

and transparently, given the violations committed are

related to the livelihoods of many people such as

environmental damage, human rights violations, and

so on.

Besides that, DEF also has to be more fair, caring,

and responsible for carrying out its business. The

balance between the total revenue (for companies)

must be taken into account, which has been taken

from the land of Papua, with costs to be borne. The

costs here include environmental damage and human

rights violations that have occurred and their impact

on the community. Of course, an audit from another

independent party is needed, so that objective input

can be obtained to assess. Through a transparent

audit, we can find out the benefits of DEF's existence

for the country, especially the people in Papua. If it is

considered to be too small a benefit compared to the

costs incurred, the government can propose

corrections/revisions to the profit-sharing agreement,

apart from compensation for environmental and

socio-cultural damage caused by DEF.

Minister of State-Owned Enterprises (BUMN)

Rini Soemarno expressed her hopes for PT DEF to be

managed as well as possible and prioritize good

corporate governance (GCG). The company and the

government, both central and regional, will be able to

increase certainty in the operating environment and

the quality and added value of the extractive industry

going forward. Thus, it will further increase

prosperity for the people of Indonesia and the people

of Papua.

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