Scholarly article on topic 'Rethinking of Corporate Governance'

Rethinking of Corporate Governance Academic research paper on "Economics and business"

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{"Corporate governance" / fraud / capitalism / "agency theory" / "stakeholder theory."}

Abstract of research paper on Economics and business, author of scientific article — Rohmawati Kusumaningtias, Unti Ludigdo, Gugus Irianto, Aji Dedi Mulawarman

Abstract Corporate governance is regarded as an acceptable mechanism to prevent fraud in companies. However, corporation scandals still occur from year to year. This article tries to describe corporate governance from the emergence, the implementation and the underlying theories. As a result, the concept of corporate governance works stably in the framework of capitalism. This article gives predecessor analysis for further research to insert other fields such as philosophy and psychology in corporate governance

Academic research paper on topic "Rethinking of Corporate Governance"

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Procedia - Social and Behavioral Sciences 219 (2016) 455 - 464

3rd Global Conference on Business and Social Science-2015, GCBSS-2015, 16-17 December

2015, Kuala Lumpur, Malaysia

Rethinking of Corporate Governance

Rohmawati Kusumaningtias a*, Unti Ludigdob, Gugus Iriantoc, Aji Dedi Mulawarmand

aState University of Surabaya, Ketintang, 60231, Surabaya, Indonesia bcdUniversity of Brawijaya, MT. Haryono 165, 65145, Malang, Indonesia


Corporate governance is regarded as an acceptable mechanism to prevent fraud in companies. However, corporation scandals still occur from year to year. This article tries to describe corporate governance from the emergence, the implementation and the underlying theories. As a result, the concept of corporate governance works stably in the framework of capitalism. This article gives predecessor analysis for further research to insert other fields such as philosophy and psychology in corporate governance

©2016 The Authors.PublishedbyElsevierLtd. Thisis an open access article under the CC BY-NC-ND license (http://creativecommons.Org/licenses/by-nc-nd/4.0/).

Peer-review under responsibility of the Organizing Committee of the 3rd GCBSS-2015

Keywords: Corporate governance; fraud; capitalism; agency theory; stakeholder theory.

1. Historical Background of Corporate Governance

Simple corporate governance is a system to direct and control a corporation (OECD, 2004). Meanwhile, good corporate governance has long been seen as the 'holy trinity'; they are rights of shareholder, transparency, and board accountability (Calder, 2008: 2). The term of corporate governance did not appear suddenly.

The downfall of the Roman Empire, until the beginning of age of enlightenment, marked the rise of entrepreneurialism, which was practiced more by baronial marauders and the Church than by commercially private business people (Calder, 2008:6). Their trading activity was carried out in a simple manner. However, it has already shown separation between the members and the Church. This fact was the reason behind the longer survival of the church through wealth development, an essential precursor to corporation nowadays. Since then, companies operating in fields with higher risks, which was impossible for individuals to do it, started to emerge.

* Corresponding author. Tel.: +62 811-3491-283. E-mail address:

1877-0428 © 2016 The Authors. Published by Elsevier Ltd. This is an open access article under the CC BY-NC-ND license (

Peer-review under responsibility of the Organizing Committee of the 3rd GCBSS-2015 doi:10.1016/j.sbspro.2016.05.020

One of the early modern corporations is The Dutch East India Company. It was established in 1601 by the States General of the Netherlands (VOC). This company has the monopoly right to exploit Asia for21 years. This company was successful, and it survived for some 200 years paying routine annual dividend1. This form of colonialism was imitated by Hudson Bay Company in the form of joint stock companies, which survived for about 100 years. In the 18th - 19th century, trading and financial expansion developed industrialization. There were many companies operating without a strong legal basis. This made the relationship between businesses owners become more complicated and more difficult. This condition led them to make rules. One of which was the Joint Stock Companies Act of 1844 in the UK. The regulation did not have the ability to protect the wealth of shareholders. There were many events where the bankruptcy of the company was followed by the bankruptcy of the owner. This condition continued until the liability of shareholders was limited, formally by the Limited Liability Act of 1855. Meanwhile, new companies only started to emerge in the United States in 1813. However, the companies grew more rapidly compared to those in the UK and Europe (Calder, 2008).

However, this improvement in economy was coupled by several downturns. Pergamon Press, Robert Maxwell as CEO, recorded higher earning when Pergamon was sold to Saul Steinberg (Leasco-US) in 1971 (Wearing, 2005). Rolls-Roys accumulated research expense made its assets overstated massively in 19712. London and County Securities Bank (L&C) in 19733 did financial manipulation by Gerald Caplan, as CEO. This triggered Bob Tricker wrote an article, 'Perspective on Corporate Governance: Intellectual Influences in The Exercise of Corporate Governance' in 1983. He described corporate governance as relationship between top management, owners and other interested in the company (Calder, 2008: 10). Tricker then developed the idea of corporate governance in a book, 'Corporate Governance' in 1984, which got response from business, related to scandals that emerged continually in the 1980s. Michael Milken at Drexel Burnham (1976-1990) created competitive and aggressive culture that allowed employees to do unethical and illegal conduct. Securities violations, including insider trading and junk bond involved Milken and their employees (Meulbroek, 1992: 1666). Brian Burke, the prime minister of Western Australian, involved dealing business with Alan Bond and Laurie Cornell, CEO WA Inc. in Australia (Brueckner, 2014). This suggested that there was something wrong with management. Businessmen began to concern in corporate governance for controlling company.

2. Corporate Governance Practices

2.1 Corporate Governance in US

The structure of the management of companies uses one board system, consisting executive director (company leader) and non-executive director (company supervisor). In one board system, according Daniri (2014: 24), there were many cases where non-executive director was not able to work independently and objectively in overseeing the company. This happened because his duties were often mixed up with managerial tasks of executive director. In addition, members of the non-executive director were dominated by parties from the outside of the company. Chief Executive Officer has a duty to lead executive director and non-executive director. Thus, CEO fulfils his responsibilities as the head of management and the supervisor at once. It means that the CEO has a tremendous influence and authority. Thus, deviations in the interest of certain parties (agency problem) are very likely to arise. One reason for the use of one-board system is adjustment to the goal of rapid economic growth (the need for quick investment decisions) so that companies can become multinational firms in different countries. However, the introduction of one board system that gives full powers to the CEO leads to corporate scandals, such as WorldCom and Enron.

1 Over period ofsome twenty years experiences (1602-1623), VOC had two key features ofModern Corporation, split between ownership-management and transferable shares. Inversely, the EIC (English East India Company) did not have it (Gelderblom, 20012: 29).

2 This scandal affected accounting regulation to forbid the capitalisation and government policy to make Rolls-Royce Limited, privatisation under Margaret Thatcher government (Lazonick and Prencipe, 2005: 4).

3 This scandal indicated the weaknesses ofbanking auditor, Department ofTrade, and subsequent changes in regulatory (Matthews, 2005).

Table 1. Institutions, Functions, Scandals of Corporate Governance (US)

Accounting Government (Politics) Other Legal System Fraudulent statements

Name Note Name Note Name Note Name (y) main


AICPA, it provides to US SOX 2002 (US federal COSO, Provides Enron, CEO and

was AIA most relevant Congress law), mandatory, force supporting thought 2001 internal

(1887) knowledge to management by IMA, leadership on - auditor

certified public transparency. AAA, executive to - - -

accountant, AICPA, organizational - -

work with IIA, and governance, WorldCom, CEO

CIMA issuing FEI, 1985. business 2002 -

CGMA ethics, internal Tyco, 2002 CEO and

control, risk CFO


fraud, and



APB issued auditing, SEC (federal 1. The Securities Act of Profession Enforces the HealthSout CEO

(designed attestation, n government), 1933 and 1934 al Ethics AICPA Code h, 2003 -

by AICPA), quality control responsibilit 2. Sarbanes-Oxley Act Executive of Freddie CEO, CFO,

replaced statements, y activities in 2002, etc. Committee professional Mac, 2003 and

CAP (1959- standards and securities (PEEC) conduct, Chairman

1973) guidance to markets monitoring

CPAs (SAS) (1933) and making

revisions of


GASB GAAP for state FCPA (SEC The Foreign Corrupt American CEO

(Governme and local and Practices Act of 1977 Insurance -

ntal governments Department (accounting Group -

Accounting of Justice), transparency 'under Act (AIG), -

Standard 1977 1934' and bribery) 2005 CEO, and

Board), Lehman internal

1984. Brothers, auditors

FASB Improves Cases of SiemenAG (2008) Bernie Chairman

(replaced GAAP, FCPA MarubeniCorp (2012) Madoff, and

AICPA standard for Smith & Nephew 2008 accounting

APB), financial (2012) staff

under SEC, reporting for Bimet Inc. (2012)

1973 nongovernment MarubeniCorp (2012)

Tyco International Ltd


Goodyear Tire and

Rubber Company


PCAOB oversees Federal Responsible for Saytam, Chairman

(replaced independent Reserve monetary policy in US 2009 COO

AICPA audit reports System to help promote national Dynegy,

ASB, (GAAS for (1913). economic goals. Issues 2012

created by public bank regulation for

SOX 2002, companies), private banks to balance

(2002) (ASB for between government

nonpublic) and private interests.

Corporate governance concerns to employees' role on management. In US context, corporation is viewed as private actor. Management function has directed to shareholders' wealth maximization. This view affects employees' position as stakeholders. OECD figures (2000-2014) have shown that US employees have longer hours and low paid than in

any other industrialized western country4. Furthermore, there is no legal law for employee to have any representation at board level.

2.2 Corporate Governance in UK

In the perspective of UK, the country's economy depends on the efficiency of the company. Thus, the use of one-board system is expected to provide the board with responsible freedom in running the company effectively and accountably. As mentioned previously, the rise of trade and form of company in the form of cooperation has received attention through the Joint Stock Companies in 1844. Later, the lack of separation between owners and company, where company's bankruptcy was the bankruptcy of the owner, made UK to publish a Limited Liability Act in 1855. Three models of corporate governance in UK are a private company - limited by shares -, private company - limited by guarantee -, and a public limited company (PLC). In UK context, employees' representatives have the same characteristic on US' corporate governance. There is no legal law for employee to have any representation at board level.

2.3 Corporate Governance in EU

Europe frees the application of company management, choosing either the one-board system or the two-board system. France, Spain, Switzerland, Portugal, and Italy use one-board system. Meanwhile, Germany, Sweden, Austria and the Netherlands use two-board system (Daniri, 2014: 24). In managing a company, this system separates the functions of manager (director) from the function of supervisor (commissioners). Supervisors only oversee the company and give advice to the directors, but they are not given the authority to manage the company. Members of the board of directors must meet strict recruitment criteria. Under Maastricht Treaty and Amsterdam Treaty, the Social Policy is the idea that employee welfare is a fundamental part of successful economic policy (Fannon, 2003: 27). In EU context, employee representatives (known as co-determination) have seats in the board, but shareholders representatives is the only that have the deciding vote. Employee representatives concern on employee's scope. Codetermination can provide systematic communication channels and provide democratic input into company decision making.

2.4 Corporate Governance in Indonesia

In managing companies, Indonesia uses two-board system, which separates the duties and functions of managers and supervisors clearly. In general, companies operate in two fundamental differences: conventional and Islamic. Thus, the company regulations issued by the various institutions follow the company's system. Concept of Islamic company intended for Islamic Financial Institutions. IFI has two standard setters, AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) and IFSB (Islamic Financial Services Board). AAOIFI for sharia accounting and auditing standard, while IFSB for regulatory and supervisory standards. These institutions provide standards in line with Basel Committee and other standard setting to ensure consistency (Kammer et al, 2015: 17). Corporate governance in IFI is to assure on services in accordance with sharia rules and principles. IFI has attempted this issue by appointing sharia committee, known as Sharia Supervisory Board (SSB). AAOIFI and IFSB concern governance on independence and professionalism SSB, as the ultimate board who assures sharia IFI compliance. For employee's relationship, in Indonesian context, has the same characteristic on US' corporate governance. There is no legal law for employee to have any representation at board level.

4 Minimum relative to average wages offull-time workers in US has the lowest index in 2000-2014 (OECD Statistic).

Table 2. Institutions, Functions, Scandals of Corporate Governance (UK)

Accounting Government (Politics) Other Legal System Fraudulent statements

Name Note Name Note Name Note Name (y) main


Financial Develops CG Parliament Consist of: the Chartered Offers Pergamon, CEO

Reporting standard, "UK of UK made Monarch, the Institute of training in 1971

Council, FRC, Corporate several act: House ofLords, Management management

1990, bodies: Government and the House Accountants accountancy.

Code"* of Commons. (CIMA), 1919.

1. Accounting Issues accounting Joint Stock provided for Counter Fraud Develops Polly CEO

Standards Board, standards in UK. Companies incorporation Centre (CFC), tools and Peck,

1990, (replaced Released UK Act 1844 andjoint stock 2014, designed services for 1990

Accounting GAAP. companies by CIPFA. public sector

Standards Overtaken by and counter

Committee) FRC totally in fraud and

2012. corruption.

2. Financial Ensures public Limited limited liability UK Committee on CG, taken BCCI, CEO

Reporting and private Liability for shareholders over by FRC, combined reports 1991

Review Panel, compliance with Act 1855 and codes concerning on CG

1990. Act. (Cadbury - Smith Report)

3. Accountancy Investigates Joint Stock simple Cadbury Report, 1992, responded MG Rover Chairman,

& Actuarial professional Companies procedure to Maxwell, Polly Peck and BCCI Group, Chief

Discipline Board firms' conduct. Act 1856 register case. Recommended on the 2005 Designer,

company boards and accounting system to CEO

mitigate CG risks and failures.

4. Professional independent The amended series Greenbury Hampel Tesco, CEO

Oversight Board regulator of Companies companies act Report, 1995, Report, 1998, 2013

(РОВ) corporate Act 1985 1862,1907, recommended combined

governance. 1908, 1928, director Cadbury and

1929, 1947, remuneration. Greenbury

1948. Report.

5. Auditing Sets standards of Companies Act 1989, amended Turbull Report, 1999. Board

Practices Board, auditing and Company Securities Act 1985, obliged to maintain internal

1991. provide public Financial Services Act 1986, control, audit practices, ensured

confidence to Fair Trading Act 1973, the quality of financial reports,

audit process. Policyholders Protection Act and detected fraud.

1975, and Company Directors

Disqualification Act 1986

6. Board of Responsible The Companies Act 2994 Myners Report, 2001. It

Actuarial Actuarial regulated for Audit, concerned to institutional

Standards, 2005 Profession Investigations and Community investors for their best interest on

standards. Enterprise their beneficiaries.

IASC (1973- Responsible for The Companies Act 2006 Higgs review, 2003, responded to

2001) developing IAS regulated comprehensive code Enron case. It concerned on

of company law for the UK effectiveness of non-executive

directors and auditor committee.

IASB, 2001, Issues IFRS Bribery Act 2010 (repealed Smith Report, 2003, responded to

(replaced IASC), Public Bodies Corrupt Practices Enron case. Recommended to

be international Act 1889, Prevention of independence auditors.

body Corruption Act 1906;1916).

Institute of Designed to Bank Of Responsible for CIPFA, 1885, Provides

Chartered achieve high level England, monetary policy member of professional

Accountants in professional 1694. in UK to help IFAC. qualification

England and experience. promote for public

Wales national sector

(ICAEW), economic goals. accountants.

member of IFAC.

ACCA, 1904, Enhances the

member of value of

IFAC. accounting in





Table 3, Institutions, Functions, Scandals of Corporate Governance (UE)

Accounting Government (Politics) Other Legal System Fraudulent statements

Name Note Name Note Name Note Name (y) main


IASB, Responsible European Executive body to European Improving CG Parmalat Chairman

2001 for Commission propose Corporate through independent (Italy), and CEO

developing, ,2009 legislation Governance scientific research. It 2003

preparation, (European Institute contributes to debate

issuing IFRS Parliament), (ECGI), the best corporate

and its implements 2002. governance

interpretatio decision, formulation of policy

n maintains the EU and development.

treaties, and

manages business

Federatio Analyses European Maintains price Arcandor CEO

n of and Central stability and (Germany),

European contributes Bank, 1998 monetary policy 2009

Accounta to in Eurozone.

nts regulatory,

(FEE). public policy



to European



European Organization Schlecker COO and

Federatio for national (Germany), CFO

n of accountants 2012

Accounta and auditor

nts and who focuses

Auditors on SME

For services in



Table 4. Institutions, Functions, Scandals of Corporate Governance (International)

Accounting Government (Politics) Other Legal System

Name (y) Note Name (y) Note Name (y) Note

IFAC, 1977. Promotes high quality accountants and establishes international standards. UNCAC, 2003. United Nations Convention Against Corruption IAASB, it was IAPC (1978). Member of IFAC. Supports quality of assurance and facilitating implementation standard globally.

PIOB, 2005 Oversees the public interest activities of standard setting boards. OECD Anti-Bribery Convention, 1997. Regulates corruption in OECD contries. IAESB. Member of IFAC. Provides guidance to education standards.

IASB, 2001 Develops, preparation, issuing IFRS and its interpretation. OECD Principles of CG, 1999, revised in 2004, 2015. Provides guidance through recommendations for the best practice of CG IE SB A. Member of IFAC. Develops ethical standards for professional accountants.

CGMA, 2012. Promotes management accounting globally. IPSASB. Member of IFAC. Provides standards for financial reporting by public sector.

IOSCO, 1983. Regulates securities and futures markets in the world. BCBS, 1974. Member of IFAC. Provides the Core Principles for Effective Banking Supervision.

IAIS. Member of IFAC. Provides supervision of insurance industry globally.

Table 5. Institutions, Functions, Scandals of Corporate Governance (Indonesia)

Accounting Government (Politics) Other Legal System Fraudulent statements

Name Note Name (y) Note Name (y) Note Name (y) main

(y) players

IFSAB Develops high House of Function of Indonesia Regulates Lippo Bank, BoD and

(DSAK- professional Representative House of Financial and 2002 internal

IAI), accountants and and President representative Services supervises auditor

member issued stipulate law. are legislative, Authority/ financial

oflFAC, Indonesian budgeting, and OJK, 2011. services

1957. GAAP. oversight sector.



GAAP has two Indonesian Law Regulation for Governance Increases Kimia Director and

tiers: No.40/207 on listed company Policy best practice Farma, 2002 external

Limited in Indonesian National culture of - - auditor

Liability Stock Committee good Indofarma, Marketing

Company Exchange. (KNKG), governance. 2002 manager

2004. KNKG ISN, 2006 Director

issued Century, Director

Corporate 2008 -

Governance BRI, 2011 Head of

Code, which Branch

is in line Office

with OECD


S AK, for listed Indonesian Law Regulation for Commission Monitors, IFI:

company and No. 8/1995 on capital market for the investigates Bank Islam -

other entities Capital Market activities Eradication and Malaysia CEO

with significant of prosecutes Berhard, -

public Corruption corruption 2005 Dubai -

accountability (KPK), 2002. cases in Islamic CEO

(convergence state Bank, 2009

process to IFRS) governance.

SAK ETAP, for Bank Indonesia Establishes and Mandiri Head of

entities with no maintains Syariah Branch

significant rupiah stability Banking Office and

public (Indonesia), accounting

accountability. 2013 staff

3. Discussion

Corporate governance has internal control; it is represented by the board structure. On one board system, although it is not clear separation duties, non-executive directors are responsible to supervise performance of executive directors. Meanwhile on two board system, commissioners have supervisory function. While for external control, many institutions issued regulation, guidelines, and standards. Tables 1-3 summarize institutions, functions, and scandals of corporate governance.

Table 1-5 explain institutions as external control has not able to prevent corporate governance failure. It was proven by the scandals, including for Islamic Financial Institutions. The main difference from the implementation of corporate governance is the governance structure and employee's representative. Meanwhile, in the corporate governance rules, all countries have tried to do their best, but some scandals still occur from year to year. What causes the financial scandals? According to Ghoshal (2005) were caused by fraud10, done by management. The involvement of management dominates fraud cases. Beasley, et al. (1999:5) found that 72% of fraud cases were done by directors (CEO), 43% by CFO, and 83% were done together by both. The next proportions are cases done by internal control

director, operations director (COO), and other board members. How does the world respond to the fraud cases? Coffee (2005: 1) revealed that"when the bubble burst, scandals follow, and, eventually, new regulation". The regulations are designed in layers to prevent repetitions of abuse of roles and procedures within the company. One that might be absent from the prevention efforts are the party that are expected to be limited by the newly issued rules5, i.e. the executive. In reality, they are individuals with a higher intellectual ability, experience, influence, and broader access in the organizations. These capabilities enable them to take action outside normal organizational routines. In decision making, managers even sometimes are able to break through the system through a unilateral policy 6 (Kilfoyle, et al., 2013).

On the other hand, the similarity of all conventional practices of corporate governance is the enactment of theory. There are two theories underlying corporate governance. Firstly, shareholder theory arranges relationship between shareholder as a principal and the manager as an agent, it refers to agency theory. In this theory, shareholder's prosperity is the central aim of the firms. As a consequence, the agent is expected to perform for the best interest of the shareholder. Together with that, shareholder activities are monitoring and controlling the agent through enforcing changes in the firm's structure of internal control (Lashgari, 2012). Shareholder theory applied based on utilitarianism approach. This means it is expanded to value judgments by principle of maximizing happiness and minimizing pain (Rodgers and Gago, 2004).

Secondly, stakeholder theory explains relationship between corporate and stakeholders. Stakeholders are defined as any identifiable group or individual who can influence the achievement of firm's purposes (Freeman and Reed, 1983). Hence, stakeholders deserved and required management priority since they contribute to gain benefits. This theory is applied based on deontology approach. This approach emphasizes the rights of individuals and the judgments related with a particular decision process rather than on its choices (Rodgers and Gago, 2004). This means that the decision is encouraged by a judgment based on a perception of a circumstance. As follows, corporate may action to balance the interest of identified stakeholders as long as has good consequence for corporate.

Both theories in its implementation confront criticism. There are two criticizes on shareholder theory. First, using utilitarianism, management allows to ignore other stakeholders while considers only shareholders' interest. Thus, short term profits are sought whereas long term survival of the corporation is doubted. Enron and WorldCom were only some representation of many corporate governance failure based on this theory. Second, there is no agency contract between management and shareholder, since shareholders buy their stock from previous owners, not from the corporation. There are never any dealings personally between management and the shareholder. The primary agency problem is not conflict between outside investor and management, but between outside investors and controlling shareholders who have nearly control management. In the large corporation, shareholders are only beneficiary who own stock; they have no legal elements necessary to establish an agency relationship (Post, 2003a; Velamuri and Venkataraman, 2005).

In addition, there are two criticizes on stakeholder theory. First, stakeholder theory is unworkable because it is ambiguous and inconsistent. There is not exactly definition who the stakeholders are. This means that the corporation still has to focus, prioritize, and identify stakeholders who can influence the achievement of firm's purposes. As a consequence, this also be a discrepancy between the stakeholder requires and the corporate actually delivers because of prioritize mistake. Second, there is still has an agency theory. According to Lashgari (2012); Rezaei, and Jalilmehr (2012), at big corporation, common shareholders have the right to choose their agent on the board of directors of a corporation. General Meeting of Shareholders has the right and responsibility to remove poorly performing managers. This means that an agent who is not concern with shareholders' interest will be changed by General Meeting of Shareholders. As follows, diverting the firm's resources to purely socially activities is unethical because it goes against the fiduciary obligation due to the shareholders (Coelho, et al, 2003).

In addition, implementation of agency theory can be seen clearly in employee relationship. In the US, employees are treated as people who must carry out their obligations. Meanwhile, in the EU, the protection of company towards

5 The relation between regulation and doer is likened as smoke and fire. If the effort is only directed to remove the smoke without extinguishing the fire, the effort will be futile (El -Ashiy, 2011:104)

6 known as vernacular accounting.

employees is better. This can be achieved by taking all the interests of the company into account. By increasing the value of stakeholder, the shareholder's interests can be protected indirectly. This agency theory is also conducted by IFI. According to Choudhury and Hoque (2004) and Iqbal and Mirakhor (2004) stated that Islamic corporate governance is a stakeholder model by protect interest and rights of stakeholders than only for shareholders (Hassan, 2010: 8)7.

The article argues that both theories appearance the mechanisms of power through capitalism by protect theirs interest. Jackson and Carter (1995) describe corporate governance is concern with organizing things (including people) within the concept of economy. Shareholder theory protects stockholder by maximizing their wealth whereas stakeholder theory protect firm's survival by increasing interest on identified stakeholders. This means that the selective stakeholders are who have the most influence to the firm's objective for long term. Moreover, based on capitalism, management has his discretion to choose stakeholder who has benefit, importance signifying, value, and contribution to the firm.

Maximization of wealth and stakeholder identification in economic manner is the reflections of capitalism. Capitalism is rooted in Calvinist ideology (Weber, 2006; McGowan, 1999; Kaletsky 2010), which accumulates capital based on the goal of achieving material satisfaction. This trait fosters individualism in human beings. Capitalism is built on the truth of human nature, which is giving reward and opportunity to individuals who work diligently to advance and succeed (Eberle, 2014: 37). Countries that implement capitalism believe that they can get a good position in the global competition (Nasr, 2009) because they bring improvement on the standards of living (Kasser, 2007: 60). Preservation of individualism (self-interest) is only objected to material, which comes from human nature, which is a powerful way to prosper themselves and the environment. This understanding naturalizes the application of capitalism in business activity. It means that the thought and ideology that human is self-interest in nature, which must compete to obtain material prosperity, paint their social life, and the though and the ideology are believed as something natural. The criticisms on this understanding are four: material objective, psychological assumptions, the nature of self-interest, and the reality of life. First, people who see the reality of life limited only to material awareness will only be motivated by material (Kasser, 2007: 68). Individuals in this stage have the lowest awareness. They see and understand their self and their environment in narrowly based on sensory pleasure or physical needs (Mustafa, 2005). This consciousness is limited. Second, when the psychological assumptions are not clearly identified, the nature of individuality will be simplified and claimed as human nature, natural reasonable thing possessed by every human being (Kasser, 2007: 68). In fact, individuality in capitalism leads to injustice (Kaletsky, 2010), social inequalities (Hertz, 2004), and the waning of nationalism (Nasr, 2009). This means that psychology should be more careful in identifying the manifestation of individualism in capitalism. Third, in the existence of the organization, individualism, analogized simply in mathematical equations, is the denominator, and good qualities such as competence, integrity, and intimacy is the numerator. The larger the denominator (individualism), then the results obtained (in the form of self-confidence on the environment) will be smaller. It means that individualism does not support the advancement of organization, but it sows the seeds of failure instead. Fourth, the reality of life is not only dominated by competition. Ruth Benedict (anthropologist) found that cultural factors (togetherness and concern) also determine people's behaviour. In the Zuni, Hopi, Arapesh, and Pueblo Indian, which became the place of her research, passion to compete defeating others was not found. The passion to help others in the face of adversity was actually found.


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