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The importance of corporate governance in

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 Global Business and Economics Research Journal
ISSN: 2302-4593
Vol. 1 (1): 25-31

The importance of corporate governance in public

sector
Martin Surya Mulyadi
Bina Nusantara University, Jakarta and MY Consulting Center, Jakarta
martin@binus.ac.id, martin@my-consulting.org

Yunita Anwar
Bina Nusantara University, Jakarta and MY Consulting Center, Jakarta

Muhammad Ikbal
Bina Nusantara University, Jakarta

Abstract:
Public sector and private sector are two different entities with different responsibility. In
relation to corporate governance, despite of this difference, there are corporate governance
principles applicable for both entities: accountability, transparency, etc. The first guideline on
public sector corporate governance is developed in the UK based on The Cadbury Report.
The most important thing in the public sector corporate governance is performance aspect
and conformance aspect is equally important. In this paper we analyze whether the citizen
and community perceived this public corporate governance as an important thing. We
conduct the research in Indonesian tax office, using taxpayer as our research object. And
from the statitiscal analysis, we found out that public sector corporate governance is essential
to improve service quality.
Keywords: Corporate governance, public governance, accountability, transparency. 25

Citation:
Mulyadi, M. S., Anwar, Y., and Ikbal, M. (2012). The importance of corporate governance in public sector. Global Business and Economics
Page

Research Journal, 1(1): 25-31.

Global Business and Economics Research Journal. Available online at http://www.globejournal.org

Mulyadi, Anwar and Ikbal Global Business and Economics Research Journal
Vol 1 (1): 25-31 ISSN: 2302-4593

1. INTRODUCTION
Usually corporate governance is associated with private sector entity. The collapse and
scandal of many big corporation trigger the emergence of Sarbanes-Oxley Act showed there
is a need to improve a corporate governance practice. While a private sector corporate
governance is common discussion and research topic, we also need to pay attention to public
sector corporate governance.
According to Ryan and Ng (2000), there has been increasing worldwide attention to
corporate governance in the public sector. UK and Australia, for example, issued a
framework of corporate governance in the public sector and guideline of how to apply
principles and practice of corporate governance in the public sector.
Even more, Benz and Frey (2007) suggested that to improve the weakness and failures of
private sector practice as shown by the collapse and scandal of big corporation, corporate
governance (private sector corporate governance) can learn from public governance. Public
governance could give a new insight to improve governance of the corporation.
Although there is no example of spectacular public governance failures, the importance of
public governance is crucial. Key to better practice of public governance lies in the effective
integration of the main elements of corporate governance within a holistic framework, which
need an effective communication throughout the entire organization and supported by a
corporate culture of accountability, transparency, commitment and integrity (Barrett, 2002).
In this paper, we are going to research whether the community and citizen also have the
same perception that public governance is important. Public sector as our research object in
this paper is Indonesian tax office. We used a questionnaire distributed to taxpayer to
measure their perception on this public governance and a statistical analysis.

2. LITERATURE REVIEW
2.1 The differences between private and public sector
As mentioned earlier, private sector governance is a common discussion and research
topic. But there is also an increasing attention to public sector corporate governance as well.
In this section, we discuss what is the differences between private and public sector. Example
of distinctive nature of public sector for example: many objectives, minister(s) as
shareholder(s) and different types of accountability (Edwards and Clough, 2005). More
detail on this differences could be seen in table 1.
26

Although there are differences between private and public sector, there are corporate
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governance principle applicable for both private and public sector. For example:

Global Business and Economics Research Journal. Available online at http://www.globejournal.org

Mulyadi, Anwar and Ikbal Global Business and Economics Research Journal
Vol 1 (1): 25-31 ISSN: 2302-4593

accountability, transparency, a focus on performance, commitment and integrity; with the

first three become main research object in this paper.
Private Sector Public Sector
Mandate Profit maximisation, considering Welfare maximisation, considering community
corporate interests only interests, involving trade-offs
Goals Generally clear Often deliberately vague to satisfy different
stakeholders
Performance Standardised financial ratios Financial ratios meaningless. Other performance
metrics indicators used
Efficiency Technical efficiency basic requirement Economic efficiency is often at cost of technical
efficiency. Effectiveness often more important
Costs Firms own costs used for decision- Community costs, including externalities,
making deadweight losses
Prices Generally constrained by market Dependent on policy from free provision
through to prohibitive
Allocation on ability to pay Allocation often on welfare grounds
Revenue From sales Mainly from tax, also from some natural
monopolies
Investment Based on firms interests and cost of Community interests and unclear cost of capital
criteria capital
Financial Often through profit centres Because revenue and expenses are separated,
controls most control is through cost centres
Cash flow crucial to survival Cash not an operating constraint, but government
has a macro monetary role
Sovereign risk External Internal
Product Decided by corporation Mandated by government cannot abandon loss-
choice making activities
Products Goods & Services At Commonwealth level, mainly monetary
transfers
Policy Incidental activity (marketing, product Core activity
changes)
Organization Often defined by core or distinctive Often pieced together from bits and pieces of
definition competencies market failure departments have to house many
disparate activities
Ownership Often complex with partially owned Usually simple, but relation to assets complex
entities many assets held in trust rather than outright
ownership
Unique asset of taxation authority
Power Related to economic strength, checked Strong coercive power, capacity to change own
by government and the law rules
Stakeholders Shareholders, free to own or dispose of Voters, with limited capacity to opt in or out
legally shares, with power related to holding (Migration)
defined
Other Employees, creditors, suppliers, Same set of stakeholders, but weighting of
stakeholders communities communities much heavier
System Well-defined corporation and its Poorly defined public policy reaching into all
boundaries environment areas of life complex systems
Governance Directors and managers Agency heads, ministers, executive government,
parliament tensions between loci of authority
Continuity Occasional takeovers, mergers Regular hostile takeover bid, sometimes
successful
Accountability Defined by standards, generally for Wide, more open, fluid
shareholders and creditors, otherwise
27

closed to public
Legal Binding Can change legislation
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constraints

Global Business and Economics Research Journal. Available online at http://www.globejournal.org

Mulyadi, Anwar and Ikbal Global Business and Economics Research Journal
Vol 1 (1): 25-31 ISSN: 2302-4593

Motivation Instrumental, personal Public service

assumption Generally lower pay
Legacy Protection, highly regulated economy Job security, many GBEs overstaffed with low
productivity
Source: Ian McAuley as cited from Edwards and Clough (2005)
Table 1. Public sector and private sector differences

2.2 Public sector corporate governance

According to Tricker (1994), there are two aspects of corporate governance: conformance
and performance. Conformance consists of two elements: monitoring and supervising
executive performance; and maintaining accountability. While performance consists of
strategy formulation and policy making.
In private sector, more emphasis is given to conformance aspect. But in the public sector,
performance aspect is as important as conformance aspect (Hodges et al., 1996). Therefore,
public sector corporate governance basically concerned with structures and processes for
decision-making and with the controls and behaviour that support effective accountability for
performance outcomes (Barrett, 1998).
Cadbury Report in the UK (1992) identified three important principles of corporate
governance: openness, integrity and accountability. This Cadbury Report is a report to
Cadbury Committee, a formal committee which was set up to address financial aspects of UK
private sector corporate governance. This report was used as foundation for the first public
sector corporate governance framework developed by British Chartered Institute of Public
Finance and Accountancy in 1995 (Percy, 1994; Whiteoak, 1994). One of the weakness of
this framework is that they are based on broad principles (openness, integrity and
accountability) instead the detailed one.
In Australia, Australian National Audit Office (ANAO) focused on the corporate
governance structures within Commonwealth Budget-funded agencies. They developed five
key operating principles which consist of: leadership, management environment, risk
management, monitoring and accountability. The inclusion of leadership and risk
management in the key operating principles measure performance aspect of corporate
governance. This is in line with Hodges et al. (1996) who argued that performance aspect is
as important as conformance aspect in the public sector. Previously, framework used in the
UK only put emphasise to conformance aspect. Although this is a framework for public
28

sector, ANAO believe that this framework is also useful for management of public sector
who is close in purpose and structure to private sector (ANAO, 1997).
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Global Business and Economics Research Journal. Available online at http://www.globejournal.org

Mulyadi, Anwar and Ikbal Global Business and Economics Research Journal
Vol 1 (1): 25-31 ISSN: 2302-4593

2.3 Complexity of public sector corporate governance

Most corporate governance literature concluded that corporate governance framework
must be tailored to each organization, as there is difference need between one and another
organization. The complexity arised in public sector corporate governance as there will be a
more complex relationships between those with primary accountability responsibilities
(parliament, ministers) as opposed with private sector.
Private sector corporate governance often relatively more straightforward as the roles and
responsibilities are more clearly defined and generally involve a narrower range of active
stakeholders (Barrett, 2002).

2.4 Key principles and steps to enable effective public sector corporate governance
Public sector must adhere to six main elements to apply an effective public sector
corporate governance. These six main elements could be divided by two, related to personal
quality and non-personal quality. The first three main elements which is related to personal
quality of those in the organization are: leadership, integrity and commitment. And the other
three elements are product of strategies, systems, policies and processes which are:
accountability, integration and transparency (Barrett, 2002).
To reach an effective public sector corporate governance, each public entities must ensure
these six main elements. From these six elements, it is understandable that to reach an
effective public sector corporate governance and even better practice will need collaboration
from both sides: improvement of personal quality and also improvement of the strategies,
systems, policies and processes. Without improvement from both sides, there wont be an
effective public governance.

3. METHODOLOGY
The equation used for statistical analysis in this paper is:
y = + 1X1 + 2X2 + 3X3
where y is service quality (community and citizen perception on public sector corporate
governance), x1 is accountability, x2 is transparency and x3 is efficiency and effectivity.
According to previous literature review, it is said that in public sector corporate governance
performance aspect and conformance aspect is equally important. Therefore, we measure
efficiency and effectivity as performance aspect measurement while accountability and
29

transparency used to measure conformance aspect. In order to measure these variables, we

Page

used questionnaire distributed to taxpayer and we use likert scale.

Global Business and Economics Research Journal. Available online at http://www.globejournal.org

Mulyadi, Anwar and Ikbal Global Business and Economics Research Journal
Vol 1 (1): 25-31 ISSN: 2302-4593

4. DISCUSSION
The result of regression analysis from the equation used as mentioned in methodology
section could be seen in table 2.

Unstandardized Standardized
Coefficients Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) 4.918 1.891 2.601 .011
X1 .120 .052 .143 3.343 .002
X2 .205 .058 .375 3.541 .001
X3 .137 .037 .316 3.718 .000
Source: Data processed
Table 2. Result of regression analysis

From table 2, it can be seen that all variables are significant in 1% (accountability,
transparency and efficiency and effectivity). This means all variables positively contributed
to service quality. And also community and citizen believe that all aspects of public sector
corporate governance is important to be implemented for an effective public governance.
From this result, it could also learned that in order to improve public sector service, quality
and perception it is really important for them to improve on their corporate governance
aspects (leadership, integrity, commitment, accountability, integration and transparency).

5. CONCLUSION
Public sector corporate governance is discussed in this paper. As opposed to private sector
governance, public sector corporate governance is more complex due to its relationships
between those with primary accountability responsibilities. First guideline for public
governance set up by UK adopted The Cadbury Report. Core corporate governance principle
applied to private sector applied as well to public sector, such as: accountability and
transparency.
From our research, we found out that community and citizen perceive that public sector
corporate governance is essential in determining its service quality. Using three variables
(accountability, transparency and efficiency and effectivity) to measure both conformance
and performance aspect, we find all aspects have a positive and significant correlation to
30

service quality (perception on public sector corporate governance).

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Global Business and Economics Research Journal. Available online at http://www.globejournal.org

 Mulyadi, Anwar and Ikbal Global Business and Economics Research Journal
Vol 1 (1): 25-31 ISSN: 2302-4593

REFERENCES
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Program Evaluation committee, Canberra 28th July.
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Barrett, P. (2002, September). Expectation, and perception, of better practice corporate
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Benz, M. and Frey, B. S. (2007). Corporate governance: what can we learn from public
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