Speech at AusAID Conference in Canberra.

1. PARTNERING FOR DEVELOPMENT
Toward sustainable business and communities in developing countries
Noke Kiroyan
Arguably, the phenomenon of companies functioning as development agents in the
economic sense can be traced as far back as the Dutch East India Company (known under its
Dutch acronym VOC in Indonesia) that operated in the seventeenth and eighteenth
centuries in the archipelago that, in the twentieth century, became the independent nation
of Indonesia. Of course, being the object of massive exploitation of people and resources by
this private company, present-day Indonesians would protest that rather than being
development agents, VOC was a precursor to colonialism. However, it is undeniable that in
a sense some of the giants in the business world of bygone days, VOC in Indonesia and the
British South Africa Company in Zambia were performing functions that would nowadays be
regarded as belonging to the domain of government (Blowfield, 2010).
Currently, discussions about the role of business in development would invariably
lead to the topic of Corporate Social Responsibility (CSR) that has unfortunately acquired a
bad connotation in some quarters due to the misuse of the concept for Public Relations
purposes. I am not saying that companies should refrain from including CSR programs and
concepts in their reputation building scheme, but overzealous publicity-seeking using the
CSR platform may backfire as it is regarded as a gimmick. Or worse, people suspect it is a
smokescreen or cover-up for corporate wrongdoings. The term “greenwashing” specifically
refers to excessive showcasing of CSR – particularly in regard to the environment – that has
given a bad name to a highly relevant and virtuous practice, if conducted properly.
Having said all the above, CSR has been widely practiced as part of strategic
management to secure and maintain a license to operate by engaging stakeholders in
addressing the social and environmental impact of companies through transparent and
ethical behavior. As such, CSR will continue to have a broad following among companies
adhering to best practice and aspiring to contribute to sustainable development.
I am going to talk about CSR in these terms, that is engaging stakeholders for mutual
benefit as spelled out in ISO 26000 that defines Social Responsibility as the responsibility of
an organization for the impacts of its decisions and activities on society and the
environment, through transparent and ethical behavior that:
 Contributes to sustainable development, health and the welfare of society;
 Takes into account the expectations of stakeholders;
 Is in compliance with applicable law and consistent with international norms of
behavior; and
 Is integrated throughout the organization and practiced in its relationships
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2. AusAID 2012 Consultative Forum with Business
Canberra, August 21, 2012
The seven core subjects in ISO 26000 are Human Rights, Labor Practices, The
Environment, Fair Operating Practices, Consumer Issues, Community
Involvement/Development, and finally Organizational Governance. The last one underpins
and binds the other six subjects together. I will focus on Community Involvement and
Development that explicitly encourages organizations to be actively involved “in
institutional strengthening of the community, its groups and collective forums, cultural,
social and environmental programmes and local networks involving multiple institutions.”
(International Organization for Standardization, 2010). This is particularly relevant to
developing countries like Indonesia. As well, it provides an internationally recognized
institutional framework for cooperation between various government bodies in a host
country, NGOs, development agencies and individual companies as well as business
associations in assisting or accelerating economic and social development.
Please allow me at this point to discuss at some length a peculiar Indonesian
situation in relation to Corporate Social Responsibility. The current Law on Limited Liability
Companies (Law No. 40/2007) contains several articles relating to Corporate Social
Responsibility as understood by the Indonesian Government and Parliament. Particularly
onerous is Article 74 of the Law, the translation of which I will cite in full as follows:
 Paragraph 1) – Corporations in the business of and/or whose business relate to
natural resources must conduct social and environmental responsibility
 Paragraph 2) – Social and environmental responsibility as stipulated under
paragraph 1) is a corporation’s obligation that is budgeted and treated as costs
of the corporation and implemented with due consideration of propriety and
reasonableness
 Paragraph 3) – Corporations that neglect their obligations as stipulated under
paragraph 1) will be sanctioned under the prevailing laws
 Paragraph 4) – Further legislation on social and environmental responsibility
will be established under a Government Regulation
On July 16, 2007, just a month before the law came into force, having been apprised
of the “CSR provisions” in the law being drafted that would entail companies having to set
aside an amount equivalent to 5% of net profit for social and environmental responsibility,
Indonesia Business Links initiated a public forum involving thirty influential business
organizations including KADIN Indonesia, the Indonesian Chamber of Commerce & Industry.
The ad hoc coalition petitioned Parliament to withdraw these provisions and enlisted the
support of prominent personalities. The business organizations were perplexed about hints
that a special body would be established to manage the 5% collected from companies. The
joint action achieved some measure of success. In the face of this massive opposition,
Parliament relented and amended paragraph 74 but insisted that the compulsory ruling on
social and environmental responsibility must remain. Importantly, the 5% requirement was
dropped, the end result being the current wording of paragraph 2) cited above.
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3. AusAID 2012 Consultative Forum with Business
Canberra, August 21, 2012
In 2008, the Indonesian Chamber of Commerce & Industry – jointly with the
Association of Indonesian Young Entrepreneurs (HIPMI) and the Association of Women
Entrepreneurs (IWAPI) filed for judicial review of Article 74 of the law with the
Constitutional Court, but the plea was ultimately rejected.
The Government Regulation as indicated in Paragraph 4 of the article took five years
to complete. Finally, it was issued in April this year, basically reiterating Article 74. However,
it does provide an important clue on “prevailing laws” mentioned in paragraph 3) of the said
article. They are specified as legislation on natural resources or that relate to natural
resources and those that regulate business ethics. A number of laws regulating sectors and
activities are highlighted as examples, among others on state-owned enterprises, forestry,
industry, geothermal energy, electricity, mining of minerals and coal, preservation of the
environment and human rights.
An unwanted by-product of the long gestation period of the Government Regulation
is that in the absence of the implementing legislation, many regions have taken matters into
their own hands. Inspired by the original draft of the law, a number of local governments
have introduced regulations requiring companies to provide the “discounted” amount of
2.5% from profit for their version of Corporate Social Responsibility.
KADIN Indonesia and like-minded organizations, among others the National
Commission on Governance, Indonesia Business Links and the Institute for Commissioners
and Directors of Indonesia are currently advocating for an amendment of Article 74 by
referring to ISO 26000. The Indonesian Government represented by the National
Standardization Body is among those that accepted the final version of the international
standard officially launched in November 2010. The argument put forward by the
organizations is that Article 74 contradicts the definition of Social Responsibility in ISO
26000 that is supported by the government. The battle rages on and the end is not yet in
sight.
Indonesian companies are not against participating in the development of
communities. On the contrary, Corporate Social Responsibility in its various manifestations
is recognized as being part of doing business amidst a society in which major segments of
the population have only just begun to participate in the modern economy and where huge
discrepancies may threaten the social fabric. However, the fact that the multi-faceted and
evolving concept of Corporate Social Responsibility was captured within the narrow confines
of a law that is simultaneously punitive and ambiguous is a major cause for worry. The
Indonesian business community now seeks refuge in the international standard of ISO
26000 as an acceptable common platform for business and its stakeholders, including
government and the communities.
Reverting to the topic of today’s forum, possible areas of cooperation between
business, development agencies, universities and NGOs could include:
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4. AusAID 2012 Consultative Forum with Business
Canberra, August 21, 2012
 Public governance training for officials in the regions
 Enhanced or alternative livelihoods training for local communities
 Skills training for farmers and artisanal miners
 Stakeholder management
 Conflict resolution
When I was in charge of a major coal mining company called Kaltim Prima Coal (KPC)
in the early 2000s at the time it was a joint-venture between BP and Rio Tinto, I attempted
to put in practice community development that was geared to economic growth. The
Institute for Economic and Social Research of the Faculty of Economics, University of
Indonesia, was commissioned to conduct macroeconomic research into the impact of the
company on the local and national economy. The findings of the research showed that at
the time Kaltim Prima Coal produced a multiplier effect in fiscal terms of 1.9, meaning that
every dollar spent by the company generated output in all economic sectors of almost twice
its value. In terms of employment, the multiplier effect was 14, in other words, every direct
employment by the company generated 14 jobs.
My thinking at the time was to conduct community development focused on
stimulating local economic growth, including increased capacity building of local businesses
to enable them to participate in the company’s supply chain. Combined with the economic
activity of extracting and selling coal my objective was to increase the company’s multiplier
effect over time. Every two or three years the multiplier effect would be measured again as
a management tool for aligning the company’s core business with well-defined community
development programs to spur economic development. In October 2003 the mine was sold,
so I did not have the opportunity to bring the experiment to a conclusion.
Apart from partnerships with business entities, possibilities for partnering exist for
development agencies at a G-to-G level, such as:
 Comparative study of community development and capacity building in various
countries.
 Joint study and promotion of selected economic sectors, e.g. agriculture, mining,
cattle breeding and dairy industry, for targeted development efforts in alignment
with mutual interests identified in economic partnership agreements.
Many other initiatives may be developed by creating synergies between various
sectors of development with business enterprises, local or national government agencies as
well as institutions of higher learning. I hope my presentation may provide some input for
further work by development agencies in partnership with business.
References
Blowfield, M.E., “Business, Corporate Responsibility and Poverty Reduction” in Corporate Social Responsibility and
Regulatory Governance - Peter Utting and José Carlos Marques (editors), Palgrave MacMillan, 2010
International Organization for Standardization, “ISO 26000: Guidance on social responsibility,” 2010
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