1. 1
The Impact of the Limited Liability Corporation Law Number 40/2007 on Corporate Social
Responsibility Policies in Indonesia
Jacquelynn Ayton
GST 6102: Corporate/Social Responsibility
March 25, 2015

2. 2
Indonesia is a booming, emerging economy due to its vast natural resources1, with a
wealth of biodiversity comparable to the Amazon River Basin2, but it is still developing in
many ways. One way Indonesia lags behind the West is with its lack of Corporate Social
Responsibility (CSR). Some would consider the concept of CSR within Indonesia to be a
lofty idea, arguing that the greater concern of basic needs and survival in general are not
addressed by CSR3. Furthermore, CSR is typically viewed as a Western construct, which is
based on Western values4, thus, not in line with Indonesian culture. However, by ignoring
CSR practices that are always implemented in the West, international corporations such as
Nike, Reebok, Levi Strauss, and Gap have exploited Indonesia’s developing economy and its
laborers in order to make greater profits in the Westi. Additionally, logging and oil palm
companies have created severe environmental damage5. With this, it is evident that Indonesia
does in fact need the protections of a CSR policy, and in 2007 Indonesia became the first
country6 in the world that passed a mandatory CSR law, the Limited Liability Corporation
Law Number 40/2007, intending to end the abuses suffered by laborers, society, and the
environment.
This research paper aims to focus on this CSR law in Indonesia and answer the
following three questions: What historical economic and political conditions led to the
implementation of the mandatory CSR law? How, if at all, has the law impacted CSR policies
of companies operating in Indonesia? What more can be done to further the cause of CSR in
Indonesia? The first part of this paper will detail the theoretical framework that will be used
throughout. The second part will give a historical economic and political background on
1 Kemp, 10
2 Ibid,23
3 Ibid,vi
4 Ibid,1
5 Ibid,24
6 Shauki,201

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Indonesia, focusing from the time Indonesia was established as an independent republic. The
third part will be a further inspection of Law 40/2007, including previous regulations, how the
law came into existence, the outcomes of the law, and an explanation of Article 74. The fourth
part will include analysis and discussion about the points previously presented in the paper,
and contain the author’s viewpoint. Finally, the conclusion will respond to the questions
proposed in the introduction.
Theoretical Framework
The theoretical framework for this paper is based on the theory of rational choice7.
Under rational choice theory, political behavior is founded on the interests of the actors, or in
the case of this paper politicians, with little regard to the historical and cultural background of
the community, which is Indonesia for these purposes. The theory suggests that politicians are
ultimately opportunistic actors and that important decisions take place within an institutional
setting, such as a legislature.
Throughout this paper, rational choice theory will be referenced in various places.
First, the historical development of Indonesia, primarily under the Suharto regime, shows this
theory in practice. Also, the theory was displayed in the creation of Law 40/2007, and more
importantly Article 74 of said law. Finally, the implementation, or lack thereof, of the
aforementioned law exhibits the theory. In each case, political actors prioritized personal gain
over the needs of the community, which is the basic concept of rational choice theory.
Moreover, because of this self-centered and opportunistic attitude, CSR has failed to fully
flourish in Indonesia.
7 Roskin,Theory of Rational Choice

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Historical Overview of Indonesia’s Economy and Politics
Indonesia has an extensive history, but from the beginning of the 17th century until
becoming a fully independent Republic of Indonesia in 19498, the archipelago was under the
colonial rule of Holland and known as Dutch East India. During this time, capitalism ruled,
and thus capitalism was linked to colonialism9. This association, along with the oppressive
treatment of the Dutch colonizers10, led to a “positively hostile” environment for foreign
investors in Indonesia under the regime of the first president, Soekarno, especially from 1958
to 196511.
However, Indonesia opened up to Foreign Direct Investment (FDI) when the second
president, Suharto, took power. Most of Indonesia’s FDI came from countries lacking CSR12,
establishing a trend to ignore CSR practices within Indonesia. From 1968 to 1986, Indonesia
experienced great economic growth due to the international oil boom which saw more than
60% of foreign exchange revenues13. On the surface, Indonesia appeared to flourish under
Suharto, but corruption was rampant14. Much of the profit from this growth was kept by
Suharto, his family, and his political cronies,15 which can be seen as a reflection of the
rational choice theory.
The Indonesian miracle boom did not last forever, and shortly after the start of the
Asian economic crisis of 1997 emerging from Thailand16, Indonesia had a drastic economic
downturn in 1998, with a GNP growth rate of minus 15%17. This led to the end of the Suharto
8 Legge, The Revolution
9 Kemp, 2
10 Ibid
11 Ibid,3
12 Ibid
13 Sasongko, 37
14 Kemp, 5
15 Ibid,2
16 Legge, Economic crisis,publicunrest,and the fall of Suharto
17 Sasongko, 37

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reign and his so-called “New Order”18. However, through this financial struggle, the economy
has managed to partially recover, and even with the current instability, Indonesia still sees 3 to
5% growth per annum19.
The trend toward CSR in Indonesia started in the early to mid-2000s with the fall of
Suharto20. In the Suharto government, businesses previously had political protections from
community needs which led to the marginalization and impoverishment of community
members21. And after the several decades of corporate exploitation under the Suharto
administration, the public wanted more openness from corporations22, paving the way for
CSR policies.
That being said, the corruption that was extensive under Suharto continues even today,
and this endemic corruption negatively impacts CSR practices within Indonesia. Overall,
workers seem more concerned with earning a wage than getting fair treatment23. Also, labor
conditions are not viewed by Indonesian companies as part of CSR performance and
reporting24. However, the growing influence of Muslim law, Sharia, which explicitly bans
bribery, looting, or deception for the acquisition of land, may lead to a change in CSR
perspectives, and create an environment more conducive to CSR practices25. Additionally, the
government has begun to put pressure on government companies to disclose CSR practices,
showing that the government is trying to deal with CSR26. Also, the recently elected president,
Joko Widodo, has vowed to crack down on corruption27. Ultimately, it is necessary for
18 Legge, Economic crisis,publicunrest,and the fall of Suharto
19 Kemp, 10
20 Achda, 300; Rosser & Edwin, 4
21 Ibid,300-301
22 Ibid,301
23 Kemp, 8
24 Cahaya,et. al.,123
25 Kemp, 9
26 Cahaya,et. al.,123
27 Holler,Joko Widodo

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Indonesia to keep up with international companies concerning CSR in order to survive in
what is becoming a global market28.
Limited Liability Corporation Law Number 40/2007
The Limited Liability Corporation Law Number 40/2007 has several Articles dealing
with various aspects of corporations, but the Article which specifically addresses CSR is
number 74. Law 40/2007 was originally intended to update Law 1/1995 “to make it more
conducive to capitalist development”29, and Article 74 was not initially part of the law30.
Then, during public hearings, Business Watch Indonesia (BWI) argued for the inclusion of
CSR in the law31, which led to the establishment of Article 74 within the law.
In 2006, before Law 40/2007 was legislated, there was a regulation from the
Indonesian Securities Supervisory Agency (BAPEPAM) that required Indonesian companies
listed in the IDX to report CSR in annual reports32. This regulation could be considered a
precursor to Article 74 of Law 40/2007. The enactment of Article 74 has seemingly
strengthened this regulation from BAPEPAM as it has established sanctions against all
companies, not only the listed ones, dealing with natural resources which did not implement
Corporate Social and Environment Responsibilityii. This mandatory nature is important, as
government regulations are required for the framework of enforcement and community
welfare33. Furthermore, regulations are necessary to give CSR power, since voluntary CSR
can be so freely interpreted34.
28 Cahaya,et. al.,124
29 Rosser & Edwin, 11
30 Waagstein,460; Rosser & Edwin, 11
31 Rosser & Edwin, 11
32 Cahaya,et. al.,114
33 Achda, 302
34 Ibid

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The inclusion of mandatory CSR was put forth by BWI, but there were also political
reasons for promoting CSR, as is always the case within rational choice theory. Gas mining
which caused a massive mud flow was widely covered in the news, and was connected to the
Golkar political faction. Opponents of Golkar were quick to push CSR in an attempt to oust
them 35. Although there were plenty of groups who supported Article 74, there were also
many businesses that began lobbying against it saying it would damage Indonesia’s
competitive economy36.
While discussing Article 74, there were two coalitions of interest which felt strongly
about the mandatory regulations. From a business perspective, the mandatory nature of
Article 74 was frowned upon, because companies generally do not want to invest in CSR
programs that can negatively impact profits. The three main reasons that businesses argued
against mandatory CSR were: (1) the idea of forced spending was viewed as additional tax,
(2) it increased the possibility of bribes, and (3) it could create capital flight for the companies
that were too financially damaged or disadvantaged by the law37. At the same time, NGOs and
small- and medium-sized enterprises (SMEs) supported the mandatory CSR as it leads to a
communal good. Their argument was that mandatory regulations are necessary as a
“voluntary system privileges profitability over social responsibility whenever the two are in
conflict”38. After a variety of proposed changes, Law 40/2007, including Article 74, was
finally passed with no objections39.
Once the law was approved, the Indonesian Chamber of Commerce (KADIN) and
other corporations questioned the legality of Article 74 and brought it to court. The three
reasons that the legality was questioned were: (1) It showed legal uncertainty as it was in
35 Rosser & Edwin, 12
36 Ibid,14
37 Ibid,6-8
38 Ibid
39 Ibid,16

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opposition to the voluntary nature of CSR, (2) it was especially discriminatory against
corporations in the natural resources sectors, and (3) it would create a negative impact on the
economic situation of the companies impacted, namely those within the natural resources
sector. Although the legality was questioned, the Indonesian courts decided to uphold the
Article40.
Article 74 of Law 40/2007 has played a role in instituting CSR in Indonesia in four
important ways41. First, it has legally strengthened CSR due to the mandatory nature of the
law. Second, it has furthered the reception and implementation of CSR within Indonesia.
Third, it is a preventative mechanism meaning companies cannot unduly benefit from the law.
Fourth, it creates a precedent for other countries to establish mandatory CSR laws.
At the same time, there are a few questions that Article 74 leaves unanswered. The
first of these is clarification on which corporations are affected by the mandatory
requirements, i.e. what does it mean to be “connected” to a business in the natural resources
sector. Next, it is not clear who is responsible for the implementation and funding of the CSR
policies. Also, it is not specified which CSR standards should be applied. Finally, the
questions of how and by whom sanctions will be imposed on those companies that do not
implement the proper CSR policies is not clarified42.
The lack of implementation leads some to suggest that Article 74 is actually a “de
facto retention of a voluntary approach to CSR”43. With the lens of rational choice theory, it
would seem that the politicians prioritize business interests, as the task force created to
40 Waagstein,456
41 Ibid,460
42 Ibid,460-461
43 Rosser & Edwin, 2

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implement Article 74 was filled with representatives of big business44, effectively stalling the
implementation for the benefit of corporations that are opposed to mandatory CSR.
Analysis and Discussion
The relationship between CSR and Indonesia is quite complicated as the majority of
CSR motivations lie outside of Indonesia45. Within Indonesia, CSR is seen more as a
management tool for social relationships, and is not generally incorporated in corporate
strategy46. Indonesia seems slow to accept CSR due to lack of knowledge on the topic, as well
as the social and legal problems which continue to exist in the country47. Furthermore, codes
of conduct are seen as a Western imperative and employment is more important for
Indonesians than codes of conduct48. With a reference to the often (mis)quoted Marie
Antoinette quip, Kemp states, “the West may be trying to distribute cake, when what is truly
needed is bread”, highlighting the disconnect between Western attitudes on CSR and the
implications for Indonesia49. A further issue for CSR in Indonesia is that initiative and protest
by workers are generally punished50, dissuading public support for such efforts. That being
said, CSR still exists in Indonesia, generally in the most popular form of community
development51. At the same time, though it can be seen as a form of philanthropy, community
development is frequently referred to by companies as “enlightened self-interest”52, so it is
not an advanced form of CSR.
44 Rosser & Edwin, 16
45 Kemp, 11; Waagstein,458
46 Razafindraminina & Kariodimejo,9
47 Waagstein,458
48 Kemp, 15-16
49 Ibid,33
50 Ibid,21
51 Razafindrambinina & Kariodimedjo,9
52 Achda, 303

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While Article 74 can be easily viewed as a step in the right direction, there are
additional implications brought up by Waagstein that should be discussed53. The first of
which is whether the mandatory nature of Article 74 violates the essence of CSR. Although
CSR was originally established as a voluntary contribution by corporations, it has come to be
more than just a suggestion. Wayne Visser highlights everything from increased deforestation
to rampant malnourishment when explaining that the world we live in today is worse than it
was before54, which is what makes CSR no longer an option, but a necessity for life.
Waagstein’s second question is whether mandatory CSR will ensure its effectiveness.
In countries like Indonesia, it is easy to be cynical about the effectiveness of mandatory
requirements when looking at the endemic corruption within the society, especially when
applying rational choice theory and the belief that politicians, like corporations, are out for
what is solely in their best interest. At the same time, mandatory regulations may prove more
effective than voluntary ones simply due to the fear of sanctions that could be costly. This
easily ties into the third question, which is whether the mandatory nature of CSR will increase
corporate cost. While there is no link between financial profit and CSR55, as previously stated
the world has come to a breaking point and something must be done even if the financial cost
is high. In the end, human life is worth more than any monetary profit, but this is
unfortunately not always an accepted norm, which leads to companies being more concerned
about financial loss over human loss.
The final question put forth by Waagstein is whether the mandatory regulation of the
CSR law would result in a competitive disadvantage. Competitive disadvantage is elaborated
on in two ways56. First, an advantage based on profit. Second, an advantage for corporations
53 Waagstein,461
54 Visser,27-39
55 Waagstein,463; Vogel, 33
56 Ibid,463-464

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not mandated to include CSR. Although any form of competitive disadvantage is viewed
negatively in the business world, it is important to get back to why CSR is important. The
goal of CSR is not to increase profits or improve image, but rather to expand the quality of
life for all people, not just a privileged few.
Ultimately, in order for Article 74 of Law 40/2007 to have any impact on CSR in
Indonesia, it needs to be thoroughly implemented. At the current rate, very little has changed
because of the political ties of businesses that do not want to see mandatory requirements
effecting their financial profits. Until politicians put human life above bribery, this will
continue to be the state of affairs for CSR in Indonesia. The one hope is that the recent
election of Joko Widodo, referred to in Indonesia as Jokowi and commonly viewed as a
president of the people57, will see an end to the endemic corruption that has plagued Indonesia
for decades, and allow for a true reform of CSR in Indonesia.
Conclusion
This paper set out to answer three questions. The first question is what historical
economic and political conditions led to the implementation of the mandatory CSR law?
Under the theoretical framework of rational choice theory, the answer lies within the interests
of politicians. Stemming from the Suharto regime, politicians promoted financial gains over
social and environmental responsibility. The exploitation of workers and the destruction of the
environment, chiefly by foreign companies, created a situation in which people became more
concerned with CSR. Additionally, the fall of Suharto sparked a fire among Indonesians to
create a better society. This gave rise to the idea that CSR was necessary and should therefore
be made mandatory, setting the stage for the creation and implementation of Article 74.
57 Holler,Joko Widodo

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The second question is how, if at all, has the law impacted CSR policies of companies
operating in Indonesia? With the introduction of Article 74 in Law 40/2007, the entangling
alliances between politicians and business were further expressed. The group primarily
responsible for the implementation of Article 74 is lined with business people who originally
did not want it to exist. So even though the stage was set for the implementation of a
mandatory CSR law, the idea has still not fully come to fruition. That being said, the
precedence created by Article 74 can easily be developed into further laws promoting CSR.
This simply depends on whether any politicians will pursue the interests of society over their
own.
The third question is what more can be done to further the cause of CSR in Indonesia?
There are two main groups at play when answering this question. The first group is the people
of Indonesia and the second group is the politicians of Indonesia. The people of Indonesia
have to be able to get behind the idea of CSR. This is to say that it cannot be viewed as a
foreign or Western ideology, but instead one that directly effects Indonesians. Once
Indonesians believe the benefits of CSR outweigh the personal costs, they will be able to
thoroughly support its standards. At this time, the people generally appear to be short-sighted.
They are more focused on having a meal today than breathing fresh air tomorrow. This is not
an anomaly among Indonesians, as most people live for the here and now. Thus it is a great
challenge to alter this established mindset, but it is a step that must be taken in order to
promote CSR in Indonesia.
As for the second group, the politicians, they have to sacrifice their own wants for the
needs of the people. This is a goal that would look impossible from the perspective of rational
choice theory. Since rational choice theory only allows for politicians to be self-serving, it
does not allow for them to consider what is best for the community in general. That being
said, there are politicians that are more prone to listen to the people. For example, a self-made

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man who rose from the slums of central Java to become the seventh president of the Republic
of Indonesia, Jokowi has made clear his intentions to clamp down on corruption and help the
poor. Looking at Jokowi’s background, it is clear that he is not part of the political
establishment and is thus more likely to put Indonesia on an international stage for its CSR
policy.
In conclusion, CSR in Indonesia has a wealth of potential. It is currently being held
back by a mindset of desperation among the people and a pursuit of self-interest among the
politicians. Yet even though the future of CSR looks fragile at first glance, the creation of
Article 74 in Law 40/2007 and the election of Jokowi point to a massive shift in ideology
among Indonesians concerning CSR. It could even be suggested that Indonesia will one day
serve as a model for other countries concerning CSR policy.
Endnotes:
i Although these companies previously had a poor public imagedue to exploitation of workers, most have now
established CSR norms in an attempt to quell international public outrageatthe conditions (Kemp, 11)
ii The wording of Article74 of Law 40/2007 is as follows:
(1) Limited liability companies thatcarry out business activities in natural resourcesectors or thatare
connected with natural resources areobliged to implement Corporate Social and Environmental Responsibility.
(2) Corporate Social and Environmental Responsibility,as referred to in paragraph (1) represents a
responsibility of a limited liability company thatis budgeted for and calculated as an expense of that company,
the implementation of which is to be carried out payingattention to appropriateness and propriety (kepatutan
dan kewajaran).
(3) Limited liability companies thatdo not implement their obligation as referred to in paragraph (1) will incur
sanctions in accordancewith the provisions of legislativeregulation.
(4) Further provisions concerningCorporateSocial and Environmental Responsibility will belaid down (diatur)
in a Government Regulation (Peraturan Pemerintah).

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