Privatization, organizational change and · Privatization, organizational change and...

Privatization, organizationalchange and performance:evidence from Indonesia

Efa YonnediFaculty of Economics, Andalas University, Limau Manis, Indonesia

Abstract

Purpose – The purpose of this paper is to examine the relationship between privatization ofstate-owned enterprises (SOEs), organizational change and performance. It explores the processes bywhich privatization affects corporate performance through the internal changes within organizationsin a developing country context.

Design/methodology/approach – The methodology involved the use of a survey questionnaire.Responses were obtained from 86 managers in 86 organizations, comprised of SOEs, privatized firmsand private enterprises in Indonesia.

Findings – Cross-sectional analysis shows that there had been a statistical significant differenceacross the types of ownership pertaining to organizational elements that were expected to change.The evidence suggested that privatization brought about important alignments among theorganization’s goals, design elements and resources and between the organization and its competitiveenvironment.

Practical implications – The implications of the study are discussed in relation to theorganizational changes that take place in the transition from public to private sector ownership.The study contributes to our understanding about the relationship between ownership-performanceby providing an organizational change perspective on the examination of privatization-performanceeffect.

Originality/value – The paper provides insights into how privatization processes alter the behavior,incentives and performance of formerly SOEs in Indonesia.

Keywords Organizational change, Indonesia, Privatization, Organizational performance

Paper type Research paper

Introduction to the studyPrivatization has become a global phenomenon and is still among the top priorities in thepolicy agenda of developing and transitional countries. Privatization has beenconceptualized in a broad and narrow sense (Ramamurti, 2000). In the broad sense,it refers to any shift of activities or particularly the production of goods and servicesfunction from the public to private sector. This includes outsourcing, contracting-out,franchising, privatization of public finance, liberalization and the sale of state property tothe private sector (Heald, 1984; Pirie, 1985). In the narrow sense, privatization representsthe sale of state-owned enterprises (SOEs) to the private sector (Ramamurti, 2000).The general definition of privatization, advocated by the World Bank and InternationalMonetary Fund, usually refers to denationalization, particularly the sale of stateproperty to the private sector, including the direct sale of the whole or parts of SOEs toprivate agents and share issue privatizations (SIPs). This study, unless specificallystated, adopts the general definition of privatization, that is, the sale of SOEs to theprivate sector.

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Organizationalchange and

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Journal of Organizational ChangeManagement

Vol. 23 No. 5, 2010pp. 537-563

q Emerald Group Publishing Limited0953-4814

DOI 10.1108/09534811011071270

Beginning with Margaret Thatcher’s Conservative government in the UK at the endof the 1970s, privatization rapidly and forcefully spreads over the whole world,including Latin American and Caribbean, Sub-Saharan Africa, Asia Pacific and formerSoviet-bloc countries of Central and Eastern Europe (Hodge, 2000). The privatizationinitiatives of the last 30 years have significantly reduced the role of SOEs in the economiclife of many countries. Most of this reduction occurred in developing countries in the1990s. The SOEs share of “global GDP” has declined from more than 10 percent in 1979to less than 6 percent in 2001 (Megginson and Netter, 2001).

Privatization is a vehicle for foreign direct investment (FDI). FDI flows intodeveloping countries grew from $23.7 billion in 1990 to $166 billion in 1998, a seven-foldincrease, helping to contribute to growth in the stock of FDI in developing countries from5 to 20.5 percent of gross domestics product (GDP) (United Nations, 1999). Turning to theinfrastructure sector, for example, investment flows to projects with privateparticipation grew dramatically in developing countries between 1990 and 1997, fromabout $16 to $120 billion (World Bank, 1999). The World Bank Group’s PrivatizationDatabase showed that privatization in 62 developing countries continued to pick up in2004 and 2005, with 400 transactions worth about US$90 billion (World Bank, 2007).Privatization is an irreversible fact for most developing countries.

Theoretical and empirical research has already established the link between changesin ownership (privatization) and corporate performance (Vickers and Yarrow, 1988;Boardman and Vinning, 1989; Galal et al., 1994; Megginson et al., 1994; Martin andParker, 1997; Megginson and Netter, 2001), but it is less clear how privatizationinfluences organizational change and managerial practices within a firm, and in turn,corporate performance (Parker, 1995; Zahra et al., 2000; Cuervo and Villalonga, 2000;Cunha and Cooper, 2002; Viverita and Ariff, 2004).

Organizational level responses to privatization have not been widely studied(Doh, 2000; Zahra et al., 2000). The enormous changes in organizational behavior,strategy and structures, systems and incentives (i.e. changes in the “black box”) need tobe systematically and thoroughly studied in order to gain insights into thetransformation processes of SOEs (Martin and Parker, 1997; Zahra et al., 2000; Cuervoand Villalonga, 2000). The key argument in this paper is that only those privatizationpolicies that bring about positive organizational changes fundamentally different fromSOEs and suitable to a competitive market environment lead to improved firmperformance.

The aim of this study is to investigate the changes that privatization trigger withinprivatized firms. The study attempts to explore three identified organizational andmanagerial implications of privatization in Indonesia, namely: goals and objectives,corporate governance practices and organizational structure. The analysis identifiesthree fruitful avenues of research: first, general theoretical and conceptual frameworksin the extant literature that associate privatization with organizational changes andpractices; second, empirical studies that examine organizational changes and practicesresulting from the privatization of SOEs in developing economy contexts; and third,policy implications for the privatization of SOEs and the management of publicenterprises in Indonesia and developing countries.

The study is based on Indonesia’s experience in public enterprise restructuringand privatization programs. The Indonesian SOE sector has recently undergonerestructuring and privatization programs. The choice of Indonesia as a candidate

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for studying the relationship between ownership change, organizational change andperformance in a developing country is justified for a number of reasons. First, forhistorical and economic reasons, Indonesia has built-up large SOEs, which have played asignificance role in the economy. The size, scale and scope of SOEs have expanded overtime since Indonesia’s independence in 1945 and they have become a central part in thecountry’s development strategy. The size of public enterprise is large and accounted forapproximately 15 percent of GDP in 1995. At this time, SOEs employed approximatelyone million employees, equivalent to 1.4 percent of the labor force (World Bank, 1994) orequivalent to 25 percent of the Indonesia’s civil servants in 1992 (Hill, 2000). Not onlyhave SOEs employed the large numbers of employees, but they have also operated insome of the most important industries such as electricity, cement, telecommunications,banks and insurance, finance, transport, agriculture, consultancy services, construction,energy, aircraft, ships and ports. SOEs provide essential raw materials and dominatecapital-intensive sectors as power, steel, chemicals and machinery (Latifulhayat, 2008;Zhang et al., 2008). Thus, public enterprise reforms and privatization affect multiplestakeholders including public enterprise managers, employees, the government andsociety at large (Adams and Mengistu, 2008).

Second, an appropriate amount of time has elapsed since the early privatizationinitiatives in 1991 to begin to explore and assess the organizational and performanceimplications of privatization programs. Third, though recognizing the importance ofprivatization in increasing firms’ efficiency, Indonesia has been relatively cautious in itsprivatization efforts. Only six of its 125 SOEs had been partially privatized throughinitial public offerings by 2003. Therefore, privatization in Indonesia is still in its infancyand its validity as part of a long-term development strategy is still being activelydebated. This study, concerned with the organizational implications of privatization,will add perspectives to those debating the consequences of privatization in Indonesia.

Finally, there is a need to analyze, at the micro-institutional level, organizationalchange and the transformation of Indonesia’s SOEs (Aswicahyono et al., 2009).Research on the impact of privatization on organizational change and performancewould help managers understand the nature of the transformation process, takingplace during ownership change. An important by-product of privatization and publicenterprise restructuring programs in Indonesia is the growing demand for effectivemanagers in both SOEs and privatized firms.

The rest of the paper is structured as follows. The next section takes the form of areview of relevant literature on organizational and managerial implications ofprivatization. It presents the theoretical frameworks of the study and outlines thegeneral proposition of the analysis. Following this review, the methodology andempirical findings of the study are presented together with a concluding discussion.

Theoretical framework: organizational and managerial implications ofprivatizationIn explaining organizational and managerial implications of privatization, there are threetheoretical foundations that have been taken from economic and organization research.These foundations relate to agency, public choice and property rights (Vickers andYarrow, 1988; Martin and Parker, 1997; Hodge, 2000). These central theoreticalfoundations are captured in Table I. On balance, privatization theories centrally posit thatprivatization increases corporate performance (that is, the firm’s efficiency), though they


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say little about what happened within organizations in the search for that corporateperformance. However, privatization theories indicate potential organizational andmanagerial implications of privatization, that is, the changes in managerial incentives,corporate governance and organizational structures. The content of organizationalchanges as a result of privatization is mainly unexplored.

Both agency and public choice theorists, for example, anticipate that privatizationwill induce changes in managerial incentives, corporate governance and informationand control systems. Agency theorists focus on the different agency problems andsolutions to them that are available under each form of ownership. The theory arguesthat the agent (management) is assumed to have a divergent goal (often conflictinggoals) with the owners (principals). The so-called “agency problems” can be moreeffectively alleviated in private ownership through its most efficient information andincentive structure (Fama and Jensen, 1983; Berle and Means, 1932).

It has been argued that private enterprises have developed better mechanisms insolving agency problems through external control mechanisms (for example, marketsfor manager, capital and corporate control) and internal control mechanisms(for example, managerial participation in ownership, reward systems and the boardof directors) (Shleifer and Vishny, 1997). Vickers and Yarrow (1988) argue that thesecontrol mechanisms (external and internal) are virtually absent in the SOE sector.Cuervo and Villalonga (2000) claim that the owner-manager relationship is broken downinto two agency relationships, the first being the public as owners-to-politicians and thesecond the public being politicians-to-managers, which effectively weaken the controlmechanisms.

Public choice theorists focus more on the agency problems in SOEs between thepublic and the politicians. Politicians might impose political, economic and social goalsover SOEs (Buchanan, 1972; Niskanen, 1971). For the public, the cost of the state’smonitoring of public enterprises is likely offset the benefits of state ownership of these

Theoreticalbasis Contributors (among others) Central tenets

Possible organizational andmanagerial implications asfirms move from state toprivate

Agencytheory

Berle and Means (1932),Jensen and Meckling (1976)and Fama and Jensen (1983)

Goal conflicts between theagent and the principalInformation asymmetryPeople’s behavior areassumed

Changes in managerialincentivesChanges in corporategovernanceChanges in control systems

Publicchoicetheory

Buchanan (1972), Niskanen(1971) and Tullock (1965)

Business maximize profitsGovernment managersmaximize their budgetPoliticians maximize theirvotes

Less political interventionIncreasing search forefficiencyReducing socialconsiderations

Propertyrightstheory

Alchian (1965), Demsetz(1966), Lindlom (1977),De Alessi (1980) andVickers and Yarrow (1988)

The more direct andunattenuated are the rightsto property, the better theassets will be used

Incentives for managementClear lines of accountabilityCommercially oriented

Source: Author’s compilation

Table I.Possible organizationaland managerialimplications ofprivatization

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enterprises (Cuervo and Villalonga, 2000). This is not the case for other interest groupssuch as unions and politically connected people or institutions (for example, militarygroups in Indonesia) where SOEs are an easy target for rent-seeking activities. Hence,public choice theory attributes the inefficiency of SOEs to its vulnerability to detrimentalintervention of self-interested maximizing politicians or bureaucrats.

Furthermore, property rights theorists argue that the more direct and less attenuatedare the rights to property the better the assets will be used (Hodge, 2000). For example,Lindlom (1977, p. 26) stated: “Property is a set of rights to control assets”. Martin andParker (1997) argue that the property rights literature places heavy emphasis upon theattenuation of property rights where public ownership exists. The basic prediction fromthose who hold the property rights view of privatization is that private organizations inwhich rights to profits are clearly defined will perform better than those in the publicsector where rights are diffused and uncertain (Alchian, 1965; De Alessi, 1980). It isargued by these writers that property rights uniquely featured in private ownershipcreate incentives for profitability.

Therefore, central to the basic prediction of privatization theories about efficiencyimprovement is the assumption that a change in ownership and the introduction ofcompetition will trigger significant change within the privatized firms, making themmore responsive to external demands and creating more incentives for management tosearch out internal cost savings. Agency, public choice and property rights theoryprovides a strong indication that privatization is likely to alter the basic elements ofSOEs, that is, the firm’s goals and objectives, corporate governance practices, incentivesstructures and control, strategy and organizational structures. The impact ofprivatization on corporate performance (efficiency) hinges on the changes of thoseorganizational characteristics (Martin and Parker, 1997; Andrew and Dowling, 1998;Cuervo and Villalonga, 2000; Zahra et al., 2000).

Agency, property rights and public choice theory offers a theoretical basis for theexpectations presented in the conceptual framework shown in Figure 1. Overall, thisstudy argues that both economic theory and organization theory predict that only thoseprivatization policies that bring about positive organizational changes fundamentallydifferent from SOEs and suitable to competitive market environment lead to sustainableefficiency improvement. Goals, corporate governance practices, organizational structureand integration are expected to change as firms move from public to private.

In the light of this research framework, the study seeks to provide answers to thefollowing research questions:

Figure 1.A framework for

analysing privatization,organizational change and

performance

Privatization- Full- Partial

Corporateperformance

Goal and objective

Characteristics ofcorporate governance

Organizational structure


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RQ1. Has there been a change in the organizational goals and objectives followingprivatization?

RQ2. To what extent has the corporate governance practices of the firm changedsince privatization?

RQ3. What changes have been taken place in organization structure andintegration since privatization?

Hypothesis developmentOne area in which SOEs can be differentiated from the private enterprises is the nature oftheir goals and objectives (Martin and Parker, 1997). In typical analyses of agency costsin SOEs, researchers rely on the assertion that managers in SOEs focus on the objectivesof politicians, rather than maximize enterprise efficiency (Boycko et al., 1996). In SOEs,the goals are blurred, multiple, conflicting and unstable and include both financial andpolitical objectives. This view is well established in the literature (Parker, 1995;Boycko et al., 1996). However, it has been widely acknowledged that the goal in privatefirms is clearer and related to profit maximization and value creation for shareholders(Martin and Parker, 1997).

Martin and Parker (1997) contend that apart from commercial goals, some SOEs mayinclude macro-economic goals concerned with some issues as employment, inflation,equity and so forth. This is certainly true in the Indonesian case where SOEs are viewedas a business entity and the government tool to realise macro-economic objectives.Aharoni (1986) added that in private firms, managers’ main goals are the pursuitof long-term profits for their shareholders. SOEs are predicted to be low performersbecause politicians impose objectives on them which may help them gain votes butconflict with efficiency and customer orientation (Buchanan, 1974; Niskanen, 1971).

Following privatization, senior managers have discretion to redefine organizationalgoals to reflect the objectives of their key stakeholders (Yarrow, 1986). A new dynamicwould occur by freeing political intervention and facing a new environment. This willstipulate firms should put more emphasis on commercial activities and maximizeenterprise efficiency (Martin and Parker, 1997). The new goals may reflect a change inpower relationships in the organization (Parker, 1995). As firms move from public toprivate, it is expected that privatization changes organizational mission and goals thatput more emphasis on the search for the efficiency, customer satisfaction and reducesocial consideration (Shleifer and Vishny, 1994).

In SOEs such as in Indonesia, the goals and objectives may change frequently withconsequent loss of consistency in strategic direction. This loss of strategic direction isusually as a result of frequent changes at the top level of the organization; brought aboutby shifts in policy by the political party in power or changes in the minister responsiblefor the SOEs. Following the privatization process, a reduced turnover at topmanagement level will likely lead to some sense of stability with consequent continuityin strategic direction. To this end, public choice and agency theorists emphasise goalsand controls as the central variables upon which the privatization-performancerelationship hinges (Cuervo and Villalonga, 2000).

In light of the above review, the following hypothesis is offered:

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H1. As firms move from public to private, the organizational goals and objectiveschange toward a greater emphasis on commercial, efficiency and customerfocus goals.

From a corporate governance view, the benefits of ownership change could be explainedin several ways. First, managers in privatized firms have to achieve a successful transferfrom public to private governance and must implement numerous policies in order toachieve expected gains in performance (Cuervo and Villalonga, 2000). Managers shoulddevelop strategies based on analysis of industry and market and technologicalopportunities. Following privatization, managers are expected to have the discretion toredefine the organizational goals to reflect the objectives of their key stakeholders(Yarrow, 1986).

Second, the benefit of privatization can be achieved by delegating managementfunctions to professional managers who have the required training and knowledge at alllevels of the company. The separation of ownership and management could, however,encourage management to be largely unaccountable to equity holders and to pursue itsown interests at the shareholders’ expense (agency costs). Privatized companies coulddevelop internal and external control mechanisms that reduce the losses associated withthe separation of ownership from management (Shleifer and Vishny, 1997). Internalcontrol mechanisms in which incentives and monitoring devices are establishedencourage professional managers to act in the shareholders’ best interest. When internalcontrol mechanisms work well, the board of directors changes the top management asneeded in the best interest of the corporation. When internal control mechanisms aredeficient, however, external control mechanisms (through stock prices, takeovers andrelation-based control) may be used to realign managers’ interests with those ofinvestors (Cuervo and Villalonga, 2000).

As predicted in agency theory, control mechanisms in private firms can be expectedto be more effective than those in SOEs, since the internal control departments andboards of directors who exercise control in private firms usually are better informed thantheir counterparts in SOEs (Dharwadkar et al., 2000). The objectives of boards andinternal control departments are also more aligned to those of firm owners’ than are theobjectives of external agencies in general.

Third, the characteristics of corporate governance may change the manner in whichthe government influences SOEs. It has been widely accepted that the degree ofexternal and political intervention in the public sector is usually higher than the privatesector. This makes SOEs very susceptible to arbitrary political involvement byministers, politicians and public servants. Public managers elsewhere have to report todifferent ministers and inspectors. They have to consult with technical ministers forsome decisions involving huge sum of financial outlay. Their operations are scrutinizedand controlled by different agencies in the government. Some of the controls arefinancial in nature, specifying performance quotas and targets. As Parker (2000)argues, it is difficult to distinguish who the principal is for an SOE. This creates acomplexity in decision making and confusion for managers. Managers of SOEs usuallyhave limited discretion to initiate and implement strategic changes (Martin and Parker,1997) and are constrained by bureaucratic controls that limit their scope of activitiesand authority.

Another expected shift in the corporate governance practices is a change in criteriaof the boards’ appointment. The overhaul of top-level management in the privatized


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firms is expected (Martin and Parker, 1997; Cuervo and Villalonga, 2000) in order toachieve a successful transformation from public sector mindset to private sectorculture. Managers with private sector experiences – equipped by necessary skills inbusiness development and venture, marketing and finance– are needed to capitalise onmarket and technological opportunities. The appointment of top level managementin newly privatized firms would be based on past experience in commerce rather thanthose with influence and political connections. In Indonesia, the president through theMinistry of Finance has effective powers to appoint the board of commissioners andboard of directors of all SOEs. SOEs have often been used as employment creation forpoliticians.

Fifth, a study by Gupta (2005) contended that in the private sector corporategovernance mechanisms often ensure that managerial behavior is monitored andcontrolled through market mechanisms such as share prices, prospective investors andthe media. This may explain why SIPs can lead to a significant impact on the efficiencyof the enterprises. However, researchers have underlined that developing countries lackmarket-supporting institutions. In this case, managers may rely largely on layoffs andon increasing sales to bring companies to profitability. Even when widely dispersed andindividually weak shareholders intend to replace incumbent management, they lack theability to attract appropriately qualified managerial candidates, and they generally failto provide management with the support it needs to implement drastic turnaround inoperations and in culture (Dharwadkar et al., 2000).

Cook and Kirkpatrick (1988) pointed out a number of reasons why privatization inthe form of a change of ownership may have a significant impact on the productiveefficiency of enterprises. They concluded that the change in ownership will: first, lessenthe scope for political intervention in the operation of enterprises and simplifyobjectives; second, improve the incentives for productive efficiency performance; andthird, impose the discipline of the private capital market on the enterprise, therebyimproving productive efficiency.

In relation to Indonesia on the “political intervention” point, for example, the Ministryof Finance along side the technical minister have to approve all strategic moves such asdiversification, geographic growth, human resource management, product change andleadership change through a bureaucratic system that foils any resemblance ofproactive strategy making. The governance of SOEs is merely a bureaucratic system,frequently composed of administrators that emphasise control, either through thepolitical agenda or trivial issues such as line-item budgetary expenditures, maintenanceor procurement procedures.

To this end, privatization is expected to shift corporate governance practices as theSOE becomes a typical private sector company. Having considered the above literature,in order to explore some aspect of corporate governance this work argues that:

H2. Privatization will lead to improved corporate governance characteristics inorder to support the new organizational objectives. The level of politicalinfluence is expected to decline in strategic decision making and boardappointments will be based on professionalism.

Successful organizations are known to be remarkably consistent in their ability to beable to achieve a viable alignment with their relevant environment (Hamel andPrahalad, 1994). Organizational structure that facilitates faster decision making and

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integrates individuals/units in the organization is important following privatization.Donaldson (1996) defines organizational structure as the recurrent relationshipsbetween the various members of an organization. The organizational structure formallyand informally identifies: authority and reporting relationships; who has resources; whois accountable for what; and how knowledge flows around the organization. It is acentral task for the organization to implement its strategy and accomplish its objectives.Donaldson (2001) mentioned that the dominant approach to structure has beengrounded in contingency theory. The heart of the argument is that the best form ofstructure depends upon the particular demands (contingencies) faced by anorganization. Wide ranges of contingencies have appeared in the literature such as:organizational size (Pugh and Hickson, 1976); operational technology (Woodward,1965); organizational environment (Donaldson, 2001); diversification strategy(Chandler, 1962); internationalization (Stopford and Wells, 1972). In brief, structure isa key component in the web of factors determining organizational performance(Whittington, 2003, p. 323). The extent to which organizational structure might changebecause of privatization remains an open debate, in fact, it has not yet been clarified inthe organizational literature. Thus, the question arises, what are the changes in theorganizational structures in the post-privatization period?

The stereotype of public enterprises structure is that SOEs are bureaucratic,inflexible, rigid and unable to adapt to the external environment. Politically controlledbodies have politically defined structures (Parker, 1995; Martin and Parker, 1997) –these are likely to be non-optimal after privatization. Therefore, it is expected thatas firms move from public to private, there will be a change in organizational structure(Parker, 1995). Furthermore, drawing upon the field of managerial economics andstrategy writers, Parker contended that privatization is associated with a movementfrom a functional form of organization to control inputs and outputs for the wholeorganization and usually requiring activities arranged in profit or cost centres.Privatization is associated with the move to a flattening of the managerial pyramid andan “m-form”, rather “u-form” structure (Martin and Parker, 1997).

Furthermore, by releasing managers from politicians’ control; privatization may freemanagers to exercise their latent managerial talent (Shleifer and Vishny, 1994).Middle-level managers, for example, whose main role under state ownership was one ofmere administrative control, might find their jobs content changed as they becomeresponsible for implementing changes and for coordinating and motivating the teamsthey supervise.

According to Zahra et al. (2000), Parker (1995) and Cuervo and Villalonga (2000)privatized companies also change their organizational structures to ensure fasterdecision making by eliminating layers of management and reducing bureaucraticrules, and integrating individuals/units in the organization. Flatter organizationalstructures, therefore, are more common in privatized companies, and they usuallyfacilitate communication and cooperation between individual and units. Improvedcommunication can strengthen employee commitment to the organization, encouragingemployees to be more productive and innovative.

Having considered the above discussion, the following hypothesis is offered:

H3. Privatization prompts the firm to adopt a flatter and more decentralizedorganizational structure that facilitates a faster decision-making process.


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Research methodsThe study was conducted in Indonesia, where the early 1990s witnessed the governmentof Indonesia espousing and introducing market liberalization and privatizationinitiatives. The study sought to investigate the organizational and managerialimplications of privatization through examining and comparing organizational andmanagerial characteristics between SOEs, partial private/privatized firms and fullprivate enterprises. As captured in the conceptual framework, three identified potentialimpacts of privatization have been selected, namely: goals and objectives, corporategovernance and organizational structure.

The findings presented in this paper were drawn from primary data from mailedsurvey questionnaire results. In the absence of archival data, particularly oforganizational and managerial implications of privatization, self-reported measures areacceptable and are often equally reliable provided that data reliability is examined(Nath and Gruca, 1997). The questionnaire was administered to SOEs, privatized firmsand private enterprises.

Privatized firms populations were a “rare case” in Indonesia; there were only sixprivatized firms until 2002, including telecommunications, bank, cement and miningsectors. There were 125 SOEs and 324 private enterprises in the Jakarta Stock Exchange( JSX) in 2002. The questionnaires were sent to all organizations: with a cover letterexplaining the purpose of the study and promising confidentiality. The organizationswere offered a summary of the study on request and returned envelopes addressed to theresearcher were attached. Follow-up actions through e-mail and mail were undertakentwo weeks after the postage date if no response had been obtained. The whole processwas conducted entirely by the researcher.

The survey questionnaire contained 31 items pertaining to the organizations’ generalcharacteristics and the six identified generic groups: goals and objectives, corporategovernance and organizational structure, together with the three core theoreticalconstructs of privatization theory. The performance data were based on the managers’judgment. This self-reported performance may be judged as a subjective measure,but previous studies found that there is a strong correlation between self-reportedperformance and actual data (Dess and Robison, 1984). The “subjective” method(self-reported performance through survey) has also been employed to captureperformance in previous studies in transitional economies (Peng et al., 2004).

The cross-sectional survey was conducted in January-July 2004. The respondentswere drawn from the top management of the organizations. By virtue of their position,they were the most knowledgeable of the organizational and managerial aspects of theimpact of privatization. A total of 49 private, six privatized and 31 public enterprises(86 organizations) returned the completed questionnaire by the cut-off date in late July2004. This yielded a response rate of approximately 20 percent.

Given the difficulties of obtaining responses to mailed surveys in Indonesia and therelative controversy of privatization concepts and implementation, the response ratewas encouraging both in terms of actual number and percentage. For example, a recentsurvey study on corporate governance in Indonesia utilized responses from66 organizations (Nam and Nam, 2004). Fahy et al. (2003) achieved a 20-percentresponse rate in a study involving SOEs and privatized firms. Gowland and Aiken (2003)surveyed the executives of 28 organizations in Australia. Martin and Parker (1997)

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used seven privatized organizations in the UK. Cunha and Cooper (2002) utilizedresponses from two in the cement industry and one in the pulp industry in Portugal.

Responses and information obtained from the questionnaire survey were processedby the statistical package for social science version 13.01.1 and analyzed using bothdescriptive and inferential statistical methods. Two pre-analysis tests were undertakento generalize the results of the questionnaire (non-response bias analysis) and to measureits internal consistency (Cronbach’s Alpha). In the non-response bias test, earlyrespondents were compared with late respondents (as a surrogate of those who did notrespond to the questionnaire). After conducting the Mann-Whitney U test, no significantdifference was reported between the two groups. The Cronbach’s Alpha test, however,was used to assess the relationship between different constructs in the questionnaire.The Cronbach’s Alpha coefficients range between 0 and 1; where 0 indicates nocorrelation exists between various parts of the questionnaire and 1 refers to perfectcorrelation between them. Huck and Cormier (1996) indicated that 0.70 is an acceptablelevel of significance for Alpha. Botosan (1997), however, indicated that 0.80 or more ispreferable. In all cases, Table III shows that the value of Cronbach’s Alpha for eachvariable is over 0.70.

The unit of analysis of this study was the organization. This analysis was based onthe respondents’ perceptions of various organizational dimensions amongst SOEs,partially privatized and private enterprises. Three levels of analysis were used in thisstudy:

(1) Totally SOEs/public enterprises.

(2) Partially privatized/partial private.

(3) Totally private enterprises.

To accommodate small sub-sample sizes and resulting non-normal distributions,which together would violate the assumptions of parametric statistics,the non-parametric Kruskal-Wallis analysis of variance was chosen (Kruskal andWallis, 1952; Vargha and Delaney, 1998). Previous studies in the field of organizationaland business studies (Al-Khater and Naser, 2003; Bishop and Megicks, 2002;Frank et al., 2001; Fraser and Zarkada-Fraser, 2003; Okabe, 2002) have usedKruskal-Wallis tests.

FindingsGeneral characteristics of the samplesThe attributes of samples are reported as a percentage distribution. The type of businessand ownership, annual sales, age, products/services sold abroad and respondents’general characteristics are presented in Table II.

Basic industry and chemicals, finance and trade, services and investmentcompanies represent approximately 55 percent of the samples. Others account forabout 4-12 percent of the sample. The study covers both manufacturing and servicessectors in Indonesia.

Ownership types of organization. Of 86 respondents in 86 organizations, 31 are topand senior managers working for the SOEs, six are senior managers working forprivatized firms and the remaining 49 are executives/management of privateenterprises. There are fewer privatized firms than the other types of organization.This is natural in the context of Indonesia, since only those organizations privatized


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Characteristics Respondents Percentage

A. Types of industryAgriculture 7 8.1Mining 1 1.2Basic industry and chemicals 16 18.6Consumer goods industry 4 4.7Property, real estate and buildingconstruction 6 7.0Infrastructure and transport 11 12.8Finance 15 17.4Trade, services and investment 16 18.6Miscellaneous industry 10 11.6Total 86 100.0B. Type of ownershipState-owned enterprise 31 36.0Privatized enterprises/mixed enterprises 6 7.0Private enterprises 49 57.0Total 86 100.0C. Sales (average net sales per year)Indonesian Rupiah (IDR) 1-100 billion 19 22.9IDR 100-500 billion 25 30.1IDR 500 billion-1 trillions 16 19.3More than IDR 1 trillions 23 27.7Total 83 100.0D. Age of the organizations (years)Less than ten 5 5.8Ten to 30 41 47.731-50 34 39.5More than 50 6 7.0Total 86 100.0E. Degree of internationalization (percentage sales sold abroad)0 50 58.10-25 19 22.126-50 7 8.151-75 3 3.576-100 7 8.1Total 86 100.0F. Respondent’s positionPresident director 7 8.3Director 12 14.3Senior vice president/vice director 47 56.0General manager 18 21.4Total 84 100.0G. Respondent’s educationSenior high school 1 1.2College/D3 3 3.6Undergraduate 35 41.7Master 44 52.4Doctoral 1 1.2Total 84 100.0

Source: Own elaboration

Table II.Organizationaland respondents’characteristics

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before December 31, 2002 were considered in this study. There were no responses fromorganizations characterized as wholly foreign owned. Furthermore, private enterpriseswere listed firms in the JSX (publicly traded companies). This should be borne in mindwhen analyzing and interpreting the data.

Annual sales. Table II illustrates the size of the organization, measured by averagenet sales. It shows that 27.7 percent recorded more than one trillion Rupiah for the lastfive years. While about 50 percent have average net sales ranging from 100 billion to onetrillion Rupiah, 23 percent recorded net average sales below 100 billion Rupiah. It can besaid that most of the studied organizations have large annual sales by Indonesianstandards.

Age of organizations. The number of years in business ranges from three years(the required minimum for inclusion in the study) to 114 years. The mean numberof years in business is 30, and the standard deviation is 17. Nearly, 85 percent of thesurveyed organizations had been in business for ten to 50 years. About 34 organizationsstarted their operation 31-50 years ago. Only six organizations had been operating formore than 50 years.

Products sold abroad. The degree of internationalization implies greatercompetitiveness and an ability to increase market size. Using the crude indicator ofpercentage of products/services sold abroad, 58 percent of the sampled firms(50 companies) sold their products/services in the domestic market only. About 19 firmssold up to 25 percent of their products/services to foreign markets, and sevenorganizations, with a high degree of internationalization, exported more than 75 percentof their products/services. Hence, the majority of studied organizations sold theirproducts and services only in the domestic market in Indonesia.

Respondents’ profiles. Table II shows that 56 percent of the respondents werecategorized as a senior vice president or vice director. General managers represent21.4 percent of the total sample, while president directors and directors are 8.3 and14.3 percent, respectively. Top management was targeted under the assumption that thisgroup of managers have a comprehensive understanding about both the endogenouscharacteristics and external environment of the organization. We confirmed that ouractual respondents do represent their own organizations.

Most respondents (53.6 percent) held postgraduate certificates, whilst about42 percent had an undergraduate educational background. Thus, the majority ofrespondents had experienced higher education, and more than 50 percent had studied atpostgraduate level. On average, respondents had been working in their organizationfor 11.8 years. This offers some degree of assurance that they knew about theorganization they represented, and the information given is reliable, as shown by theCronbach Alpha value of above 0.7 (Table III).

Ownership change and organizational goals and objectivesA Kruskal-Wallis test (H Test) was performed to examine whether firms acrossownership type significantly differ in their organizational goals and objectives,characteristics of corporate governance and organizational structure. The survey resultsare presented in Table III.

Table III demonstrates that there is no significant difference across ownership typesconcerning the importance attached to profitability, firms’ growth, financial stability,employment welfare and social responsibility goals. The mean scores show that all ofthese organizational goals are highly valued irrespective of ownership type.


performance

549

Org

aniz

atio

nal

and

man

ager

ial

char

acte

rist

ics

Cro

nb

ach

’sa

Mea

nS

D

Mea

ns

ran

kfo

rp

riv

atiz

atio

nle

vel

K-W

stat

isti

csp-

val

ue

Inte

rpre

tati

on

Goa

lsand

obje

ctiv

es0.

851

Pro

fita

bil

ity

5.62

0.71

142

.50

0.53

80.

764

Not

Sig

.2

48.9

23

43.4

7S

ocia

lg

oals

5.65

0.63

139

.97

1.12

30.

570

Not

Sig

.2

47.6

73

45.2

2E

ffici

ency

and

cost

effe

ctiv

e4.

911.

081

37.1

96.

630

0.04

2S

ig.

258

.00

345

.71

Fir

ms’

gro

wth

5.15

0.86

140

.55

1.21

40.

545

Not

Sig

.2

39.6

73

45.8

4F

inan

cial

stab

ilit

y5.

580.

661

39.9

81.

379

0.50

2N

otS

ig.

248

.17

345

.15

Em

plo

yee

sw

elfa

re5.

340.

781

42.1

10.

218

0.89

7N

otS

ig.

246

.17

344

.05

Cu

stom

erfo

cus

(pro

du

ct/s

erv

ices

qu

alit

y)

5.53

0.57

137

.32

6.10

30.

047

Sig

.2

55.5

03

45.9

4D

ecis

ion-m

aki

ng

proc

ess

0.71

6T

he

imp

orta

nce

ofth

eg

over

nm

ent

ind

ecis

ion

-mak

ing

pro

cess

3.94

1.82

161

.24

27.4

90.

000

Sig

.2

46.6

73

31.8

9T

he

imp

orta

nce

ofu

nio

nor

gan

izat

ion

ind

ecis

ion

-mak

ing

pro

cess

3.84

1.23

143

.10

0.07

90.

961

Not

Sig

.2

45.5

03

42.6

3T

he

imp

orta

nce

ofb

oard

sin

dec

isio

n-m

akin

gp

roce

ss5.

370.

801

47.1

94.

664

0.09

7N

otS

ig.

257

.25

339

.48

(con

tinued

)

Table III.Descriptive andKruskall-Wallis statisticsfor organizational andmanagerial practicesacross SOEs, privatizedfirms and privateenterprises

JOCM23,5

550

Org

aniz

atio

nal

and

man

ager

ial

char

acte

rist

ics

Cro

nb

ach

’sa

Mea

nS

D

Mea

ns

ran

kfo

rp

riv

atiz

atio

nle

vel

K-W

stat

isti

csp-

val

ue

Inte

rpre

tati

on

Boa

rds’

app

ointm

ent

Th

eim

por

tan

ceof

bu

sin

ess

net

wor

ks,

skil

lsan

dex

per

ien

ces

inap

poi

nti

ng

boa

rds

5.01

1.20

132

.69

10.0

770.

006

Sig

.2

54.6

73

48.9

7T

he

imp

orta

nce

ofre

pu

tati

onin

app

oin

tin

gb

oard

s4.

991.

211

33.6

09.

317

0.00

9S

ig.

256

.50

348

.17

Th

eap

poi

ntm

ent

ofM

inis

try

ofB

adan

Usa

ha

Mil

ikN

egar

afo

rb

oard

s3.

042.

111

66.4

856

.586

0.00

0S

ig.

254

.25

326

.43

Org

aniz

ati

onalst

ruct

ure

and

inte

grati

on0.

715

Rol

esan

dfu

nct

ion

ofem

plo

yee

sar

ecl

earl

yd

efin

ed5.

170.

741

46.5

00.

891

0.64

0N

otS

ig.

242

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341

.72

Reg

ula

tion

and

pro

ced

ure

sar

ein

pla

cefo

rem

plo

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sto

per

form

4.81

1.01

148

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5.16

40.

075

Not

Sig

.2

20.4

23

43.3

6In

form

atio

nan

dh

elp

sar

em

ade

avai

lab

len

oton

lyfo

rp

arti

cula

rem

plo

yee

s4.

530.

891

45.6

50.

420

0.81

1N

otS

ig.

241

.25

342

.42

Org

aniz

atio

nal

stru

ctu

rear

efl

atte

ran

dm

ore

dec

entr

alis

edas

com

par

edto

the

last

fiv

ey

ears

4.48

0.95

134

.60

7.39

70.

025

Sig

.2

49.5

03

27.4

4H

owof

ten

coor

din

atio

nam

ong

un

its

and

fun

ctio

ns

4.97

0.83

131

.71

0.21

60.

717

Not

Sig

.2

35.8

83

31.7

6P

erfo

rmance

0.87

9P

rofi

tab

ilit

y(a

fter

-tax

retu

rnon

sale

s/R

OS

)3.

611.

111

37.8

25.

543

0.05

4S

ig.

258

.83

344

.36

(con

tinued

)

Table III.


performance

551

Org

aniz

atio

nal

and

man

ager

ial

char

acte

rist

ics

Cro

nb

ach

’sa

Mea

nS

D

Mea

ns

ran

kfo

rp

riv

atiz

atio

nle

vel

K-W

stat

isti

csp-

val

ue

Inte

rpre

tati

on

Inv

estm

ent/

tota

las

sets

3.44

1.14

137

.98

2.41

70.

306

Not

Sig

.2

50.1

73

45.3

4M

ark

etsh

are

(com

pet

itiv

ep

osit

ion

inth

ein

du

stry

)3.

360.

821

37.9

22.

020

0.37

5N

otS

ig.

241

.92

345

.44

Nu

mb

erof

emp

loy

men

t3.

131.

001

36.1

95.

637

0.05

7S

ig.

235

.67

348

.31

Pro

du

cts

and

serv

ices

qu

alit

y(i

.e.c

omp

etit

ive

adv

anta

ge

inp

rod

uct

des

ign

,af

ter

sale

s/se

rvic

es,

tech

nic

alp

rod

uct

/se

rvic

esca

pab

ilit

y)

3.82

0.72

134

.66

6.78

10.

040

Sig

.2

50.1

73

47.4

9

Notes:

1–

SO

Es;

2–

pri

vat

ized

firm

s;3

–p

riv

ate

ente

rpri

ses

Source:

Ow

nel

abor

atio

n

Table III.

JOCM23,5

552

However, the organizations had statistically significant differences in the mean rankregarding the importance assigned to the “efficiency and cost control” goal (H ¼ 6.630,p , 0.05) and “products” quality and customer services’ (customer focus) goal, with Hstatistics of 6.103 and p , 0.05. The results suggest that the managerial incentives forefficiency and customer orientation were systematically higher in the privatized andprivate enterprises as compared to those for the SOEs. However, the pronounceddifference in efficiency and cost-effective goals exists between privatized enterprisesand SOEs. Privatized enterprises have a mean score of 6 on a scale of 6, while SOEs havea mean score of 5.39 on a scale of six. This is also evident in the products and qualitygoals where a significant difference exists between privatized enterprises and SOEs.

The survey results validate the H1 that as firms move from public to private, themanagerial emphasis on efficiency, cost reductions and customer orientation increases.

Ownership change and corporate governanceThe characteristics of corporate governance covered in the survey were the auditcommittee and its independence of management, related party transactions, politicalinterference on decision-making process and the appointment of board members.

Audit committeeThe role of the audit committee is crucial to develop internal and external organizationalcontrol mechanisms to reduce the risks of mismanagement. Table IV exhibits asignificant difference in the existence of audit committees between SOEs, partiallyprivatized and private enterprises. All privatized and private enterprises (100 percent)have an audit committee, while the audit committee only existed in 35.5 percent of SOEs.

The independence of an audit committee is a crucial factor. The independence in thiscase is met when at least one of the three members of the audit committee is independentof management, with no ownership and conflicting interests. The majority of managers

Some characteristics of corporate governance No (%) Yes (%)

Audit committee 1 64.5 35.52 0.0 1003 0.0 100

Pearson x 2 ¼ 46.237, p ¼ 0.000Independence of the audit committee (at least one of the 1 70.4 29.6three members of audit committee is independent of management) 2 0.0 100

3 6.3 93.8Pearson x 2 ¼ 38.328, p ¼ 0.000Firms have contract with directors or relations which promote 1 87.1 12.9conflict of interest 2 80 20

3 95.8 4.2Pearson x 2 ¼ 2.829, p ¼ 0.243Firm gives loan in the subsidiary companies 1 80.6 19.4

2 50 503 57.1 42.9

Pearson x 2 ¼ 5.266, p ¼ 0.072

Notes: 1 – public; 2 – partial private; 3 – privateSource: Own elaboration

Table IV.Some characteristics of

corporate governance


performance

553

in privatized and private enterprises (over 93 percent) indicated that the audit committeewas independent of management and responsible to the boards of commissioners(Table IV).

The management of SOEs, which have an audit committee, indicated that theindependence of the audit committee was seriously undermined: 70 percent ofrespondents said that the audit committee was not independent of management.As indicated by the Pearson x 2 test, there is a significant difference pertaining to theindependence of audit committee across ownership type.

Related party transactionsThe Pearson x 2 in Table IV shows that there is no significant variation pertaining torelated party transactions across ownership type. First, the majority of respondents(over 80 percent) across ownership types indicated that their organization did not havecontracts with directors, commissioners or shareholders, which can promote conflictsof interests. Second, the proportion of privatized and private enterprises allocating loansto their subsidiary companies was slightly higher than SOEs. Half of the privatizedfirms provide loans to their subsidiaries, while 57.1 percent of private enterprises do notallocate loans to the subsidiaries.

Political interferenceBased on Table III, two findings are of special interests. First, there is a significantdifference across ownership types regarding the importance of the government in thestrategic decision making (H ¼ 27.49, p , 0.005). The mean rank column shows thatSOEs had the highest mean rank, while private enterprises reported the lowest. Thisindicates that the SOEs’ strategic decision making is highly political and influenced bythe government.

Second, regarding the degree of importance attached to the boards’ appointmentcriteria (Table III), there are significant variances across ownership types in such criteriaas “the importance of business networks, skills and experiences” (H ¼ 10.077, p , 0.005),“reputation” (H ¼ 9.317, p , 0.005), “Ministry of SOEs” (H ¼ 56.586, p , 0.005).It appears that privatized firms had the highest means rank on the importance of“business networks, skills and experiences” and “reputation” in appointing their boards,while SOEs reported the lowest.

In sum, the findings provide support to H2, that privatization leads to improvedcorporate governance characteristics in order to support the new organizationalobjectives. The level of political influence was declined in strategic decision making andboard appointments were based on market criteria or professionalism.

Ownership change and organizational structureK-W Statistics (Table III) reveal no significant differences across various type ofownership with respect to the openness of internal communication and cooperationbetween individuals and units. Openness of internal communication and cooperationbetween individuals and units is highly rated by the respondents irrespective ofownership type. The respondents are of the opinion that roles and functions are clearlydefined; regulation and procedures are in place for employees to perform; informationand help are made available for all employees.

However, pronounced differences were observed pertaining to the organizationalstructure, with H statistics of 7.937 ( p , 0.05). The question concerned the flatness and

JOCM23,5

554

decentralization of the organizational structure. An inspection of the mean rank showsthat privatized enterprises recorded the highest, while private enterprises reported thelowest. The finding supports H3, that privatization leads to a flatter and decentralizedorganizational structure.

Ownership change and corporate performanceTable V reveals the proportion of firms reporting an increase and significant increase intheir corporate performance against the firms’ close competitors over the last five years.

Across all types of performance indicators, improvements are recorded in theprivatized enterprises, partly indicating the important role of privatization in enhancingcorporate performance. For example, the proportion of privatized firms that reported anincrease in profitability (80 percent) was significantly greater than for SOEs(58.1 percent). However, it is also evident from Table V that privatization is associatedwith a decline in the total number of employees. Only a third of privatized firms reportedan increase in the number of their employees in their post-privatization era. It is alsointeresting to note that the proportion of privatized firms recording a significant increasein their performance was slightly greater than for private enterprises, except for thevariables number in employment and products/services quality.

Furthermore, the Kruskal-Wallis tests (Table III) show that firms significantlydiffer across ownership types in profitability, number in employment, products andservices and quality performance relative to competitors over the last five years. Thereare no significant variances across privatization levels with respect to “investment/totalassets” and “market share relative to competitors” over the last five years.

DiscussionsThis research provides insight into how organizational changes that accompanyprivatization process influence the financial performance of privatized firms. The studyfound pronounced variations between public and privatized enterprises in the importanceattached to efficiency, cost effectiveness (cost control) and customer-focused goals.Managerial incentives were increased after privatization in the search for efficiency, costcontrol and improvement of product and service quality. This was especially true inprivatized firms, for example, telecommunication companies (Telkom Indonesia), wherethere was a shift from “engineering excellence” to “customer excellence”. From the publicservice mentality of government departments and the dominance of technical experts,privatized firms went through significant changes in the number and structure ofemployees, and radical transformation of management systems towardscustomer-oriented behavior, teamwork practices and shareholder value policies.

Indicators SOEs (n ¼ 31) Privatized (n ¼ 6) Private (n ¼ 49)

Overall profitability 58.1 83.3 81.5Investment expenditure 51.6 83.3 55.1Market share 35.5 50.0 49.0Number of employees 32.2 33.3 51.0Products/services quality 58.1 66.7 75.5

Source: Own elaboration

Table V.Corporate performance

across ownershiptype (%)


performance

555

SOEs in Indonesia have been generally characterized by inefficiencies because ofoverstaffing, dependence on subsidies, absence of competition and poorly managerialincentives. Therefore, cost savings and efficiency behavior were the most frequentlyobserved sources of performance improvement after privatization.

The effects of privatization on the characteristics of corporate governance werefound to be significant in relation to perceived improvements to both the external andinternal control mechanisms of organizations. Significant differences were found incorporate governance practices between SOEs and privatized enterprises, particularlyin terms of the existence of audit committees that were independent from management.Furthermore, privatized and private enterprises were more likely to disclose companyinformation, for instance, in related party transactions and reward systems.Privatization also lessened the room for political interference in the strategic decision-making process and the appointment of boards of directors and commissioners.For example, in privatized firms, the government, although a majority shareholder,appointed “apolitical”, commercial boards of directors. Boards were given theresponsibility for strategic direction and commercial performance, with incentivesbased on commercial performance indicators. All of these changes led to increasedmanagerial discretion in the entrepreneurship transformation.

Undoubtedly, the role of an audit committee is crucial, particularly after theeconomic crisis of 1997-1998, as recognized by Indonesia’s National Committee onCorporate Governance (1999). In January 2005, NCGP embarked on a strategic plan torevamp all SOEs, financial service providers and private and public companies and todevise codes of conduct, ensure implementation, recommend regulatoryimprovements and provide management assessment procedures using World Bankand organization for economic cooperation and development benchmarks. When anaudit committee is present, privatized and private companies are more likely to beable to develop the internal and external control mechanisms that reduce lossesassociated with the separation of principals from agents. Internal control mechanisms,in which incentives and monitoring devices are established, encourage professionalmanagers to act in the shareholders’ best interest (Shleifer and Vishny, 1997). It isevident in this study that political interference and weak internal and external controlmechanisms have been complicated by the absence of an audit committee in themajority of SOEs.

Furthermore, based on Indonesia’s security exchange commission regulation, theauditing firms (external auditors) can only audit firms that have traded their shares onthe stock exchange (that is, the privatized firms and private enterprises) for a maximumof five years. If there is no auditing period limitation, some auditing firms might colludewith their clients’ management to improve their chances of continuing the auditingservices (Nam and Nam, 2004). A five-year maximum regulation has improved thereliability and independence of auditing by external auditors in privatized and privateenterprises. Nevertheless, there has been no legal requirement for SOEs to have anexternal auditing period limitation.

The quality of corporate internal controls and supervising process in the private andprivatized firms, as indicated by the presence of an independent audit committee, isrelatively stronger than those in SOEs. Privatization is associated with the improvementof corporate governance practices as implied by the internal controls and supervisingprocess dimensions.

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556

Approval and disclosure are needed in relation to related party transactions in thecase of those amounting to at least 10 percent of corporate revenue or 20 percent of equityfor both private and privatized enterprises.

As noted earlier, privatization changes both the decision-making process and thedegree of government influence on the decision making in strategic decisions. Therefore,the change in ownership was expected to lessen the scope for political intervention in theoperation of the enterprises and to simplify the objectives (Cook and Kirkpatrick, 1988).In Indonesia, for example, the government not only determines managerial life spans,but also controls key resources, market channels and sources of raw materials for SOEs’operations.

Political influence in any form constrains the SOEs’ managerial actions to implementstrategic changes. The result suggests that as firms move from public to private, theforms of political influence are systematically reduced. It would be wrong to say thatthere is no kind of political influence in the privatized firms. In all privatized company,the government has kept saham dwiwarna (golden share), which gives the governmentthe right to veto major decisions pertaining to “very crucial issues”. This is one form ofpolitical influence. However, because of the privatization method chosen (SIPs), the stockmarket can play a role in which the company has to disclose any material issuesregarding the company’s operation. Stock Exchange (Badan Pengelola dan PengawasanPasar Modal ) regulations to some extent constrain the government’s political influence.

The results suggest that the boards’ appointment in privatized firms is based onprofessionalism criteria such as business reputation, experiences, business networksand skills. These criteria are believed to be a secondary factor, if not non-existent, amongthe SOEs. It has been widely accepted that the directors and commissioner’sappointments in SOEs are not based on merit but rather on the basis of politicalconnections and “cozy” relationships between government figures and management.This is evident by the influence of the Ministry of SOEs in the board’s appointment forwhich SOEs had the highest means, while private enterprises reported the lowest. Thisalso reinforces the findings of previous studies (Robison, 1986; Mardjana, 1993).

The findings provide support for the notion that privatization lessened the scope forpolitical influence and interference by government in the decision-making process andappointment of company boards. This is consistent with one of privatization’s rationalesin developing countries, that is, giving more autonomy to management to manage(Cook and Kirkpatrick, 1988).

Structural organizational changes resulting from privatization were found in thisstudy. As firms moved from public to private, organizational structures tended tobecome flatter, more organic and decentralized, and to move to a matrix formof structure in order to facilitate organizational integration and fit with environmentalfactors. The respondents also reported improved communication and coordinationamong individuals and units following privatization as organizations moved towardsreducing bureaucratic rules and rigidities. Notably, changes in organizational structurefollowing privatization were not just seen as a continuous process; they were also seento be multi-dimensional in nature (Erakovic and Wilson, 2005).

First, the organizations significantly decreased their overall size. Most privatizedfirms reduced the number of employees and the size of organizational units. Next, thoseunits or operations which were not considered part of the core business, or which wererelatively unprofitable, were outsourced. Last, organizations reduced their number of


performance

557

hierarchical levels. Through various transitional stages, structures were flatteneddramatically, leaving only four to five levels in operational areas.

As noted previously, the organizational structure changes were to be anticipated. Asprivatized firms are subject to market pressures and are forced to become more efficientand cost effective, organizational structures that ensure faster decision making,eliminate layers of management and reduce bureaucratic rules are crucial. These findingprovide evidence from the Indonesian context that flatter and more decentralizedorganizational structures are more common in privatized companies than in SOEs, thussupporting similar findings obtained in other contexts (Gowland and Aiken, 2003;Martin and Parker, 1997).

Corporate performanceThe respondents tended to be of the view that Indonesia’s privatization program has hada positive effect on corporate performance. Respondents indicated that privatization hadproduced a significant increase in the overall profitability and quality ofproducts/services as measured by competitive advantage in products design,after-sales and technical product/service capability. However, there was a greatertendency to significantly reduce the number of employees among privatized and SOEsthan in private enterprises. Again, these findings from Indonesia generally support thefindings of other researchers such as Yarrow (1986), Megginson et al. (1994) and Martinand Parker (1997). Martin and Parker found that performance improvementsare associated with changes in the internal environment of the enterprises and,in some cases, these changes occurred independently of ownership changes.

First, as firms move from public to private, profitability (return on sales) increases.The mean rank for privatized firms recorded the highest, while public enterprisesreported the lowest. Second, privatized firms had the lowest means rank with regard tothe number of employment, while private enterprises reporting the highest. This impliesthat privatized firms had systematically experienced the decline in the number ofemployment following privatization. In the Indonesia’s telecommunication industry, forexample, after privatization employees were reduced from 42,170 employees in 1994 to34,678 employees in 2002 (Telkom, 1994, 2002).

However, systematic reduction in the employment also occurred in the SOEs as partof business restructuring process in the government SOEs’ revitalization program. BothSOEs and privatized had experienced staff redundancies as a result of privatization andgovernment revitalization programs in the SOEs. Another factor contributing to staffredundancies is macro-economic instability resulting from the economic crisis unfoldedin the mid-1997 whereby firms reduced the number of employment. Third, in relationto products and services quality, it is obviously shown that privatized firms had thehighest mean rank and conversely, public enterprises reported the lowest.

Finally, the managerial perceptions relating to product and services qualitysignificantly differ between privatized companies and SOEs. The managementperception regarding products and services quality of privatized firms as measured bythe competitive advantage in product design, after sales/services, technicalproduct/services capability dimension were significantly higher for the privatizedcompanies. Overall, the results suggest that the managers perceive that privatizedfirms tend to perform better than SOEs with respect to profitability and products andservices quality.

JOCM23,5

558

ConclusionsThe key finding of this study is that privatization brought about major changes in theorganizational goals, corporate governance and organizational structure of privatizedfirms. These changes transformed privatized firms that fundamentally different fromSOEs and suitable to a competitive market environment. These positive organizationalchanges led to significant performance improvement. Changes in ownership structure,from public to private, alter the behavior, incentives and performance of managers andorganizations. The study contributes to our understanding about the relationshipbetween ownership performance by providing an organizational change perspective onthe examination of privatization-performance effect.

The findings highlight specific organizational changes that take place in thetransition from the public to the private sector. As such, the findings could be used toprepare managers of SOEs to take steps to manage newly privatized firms. This findingreflects the importance of leadership and participation in the privatization andrestructuring processes. This study highlights the need for human resourcedevelopment management and training programs in all developing and transitionaleconomies, targeting the managers of newly privatized firms (Metcalfe and Rees, 2005).The content of that training and development could be informed by further research intothe leadership and management challenges arising during the privatization andrestructuring programs.

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Bos, D. (1991), Privatization: A Theoretical Treatment, Clarendon Press, Oxford.

Burke, W.W. (2000), Organization Change: Theory and Practice, Sage, London.

Czaban, L. and Whitley, R. (2000), “Incremental organizational change in a transforming society:managing turbulence in Hungary in the 1990s’”, Journal of Management Studies, Vol. 37,pp. 371-93.

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Viverati, M.A. (2008), “On productivity performance gains of Indonesian firms”, ManagerialFinance, Vol. 34 No. 9, pp. 644-59.

Wright, M., Hoskinson, R.E., Buzenit, L.W. and Dial, J. (2000), “Entrepreneurial growth throughprivatization: the upside of management buyouts”, Academy of Management Review,Vol. 25, pp. 591-601.

Corresponding authorEfa Yonnedi can be contacted at: [email protected]


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