Performance Implications

Performance has become a central aspect of controlling and monitoring measurement. The role of performance is often used as a tool to assess the success of a firm or organisation in meeting its expectations or targets. These assessments emphasise the relationship between objectives and performance. An early study showed that the application of performance has been used by various traditional business measurement fields (Sirgy, 2002). Performance as an effective measurement tool has not been limited to businesses or the private sector. Rather, it has been used as a

measureable tool in other sectors. For example, the development of new public administration underlines the importance of performance as a device for measuring the government and public sector’s achievements (Townley, 2005). Objectives are set as part of the performance measurement tool. Objectives are a basis for shared expectations, planning and performance evaluations (Pearce, 1982). They are set based on the commitment that members of firms or organisations want to achieve. This commitment is included in the planning and performance evaluations. The most important factor of determining the objectives is the end result and the basic needs that need to be satisfied (Boyd and Levy, 1966). Therefore, the performance evaluation mainly aims to assess whether the organisation can resolve or meet the expectations.

The role of performance becomes more essential when the agency function is separated. Potential conflicting objectives appear when the agent and principal show different interests and risks. Within a disputed ownership structure, risks may be distributed among the owners, while management has to deal with all potential risks as a consequence of their role. The separated function of agent and principal is argued to give more opportunities to managers as the agent to achieve their own interests at the expense of shareholders (Short, 1994; Sharon and Jahera, 1991). This separated function leads to conflict, which largely result from asymmetrical information and incentives. A study of management theory showed that management behaviour is affected by risks and incentives, which are commonly asymmetrical to the achievement (Short, 1994). Managers’ efforts to achieve the objectives are directed by the degree of their own risks, such as replacement and future expectations in relation to their incentives. External factors also become an influential factor for managers’ decisions in the context of performance achievements. Mergers, acquisitions and market labour are considered to contribute to management’s behaviour related to performance achievements. Other factors, such as control, value-maximising size and regulation, are also crucial in completing expectations (Demsetz and Lehn, 1985). In common practice, these factors have a more significant influence on the success of management in meeting value-maximising expectations rather than the structure of ownership. The separated function of agent and principal requires a mechanism of control and monitoring to ensure that owners’ interests are in the best interests of management.

Performance is often attached to ownership structure. The centralisation of ownership often occurs within public or family enterprises. An earlier study showed that the centralisation of owners has negatively affected the ability of firms to make a profit (Band, 1992; Demsetz and Lehn, 1985; Short, 1994). A distinction of owner concentration from distinguish owners is attached with financial arrangement settles the power or control in the decision-making process (Sharon and Jahera, 1991). Therefore, the centralisation of ownership provides more opportunities for blocked owners to

monitor and be involved in management decision. The emergency of potential conflicts between managers and owners is stronger compared to disputes regarding ownership structure. The transfer of ownership is considered an effective way of preventing power abuse from blocked owners in the decision-making process. Performance and ownership become a prominent study following the transfer of ownership (Sharon and Jahera, 1991). A study showed that performance improvement occurs following the transfer of ownership when the management share is part of the ownership structure (Band, 1992). This is because owner interest is a crucial factor that motivates firm behaviour (Branch, 1973). Owners’ expectations are mainly pursued to maximise their wealth. Privatisation has consequences for the transfer of ownership and performance. The literature review in Chapter 2 showed that privatisation generates two significant changes: new firm structure and objectives. Further, privatisation is frequently driven by poor performance or inefficient public expenditure resulting from government involvement and privileges. Changes in market and government policies significantly affect SOEs’ business activities. An earlier study showed that firms could easily change their structure and process when the market around them changed (Arens and Brouthers, 2001). Changes in the market environment through privatisation and liberalisation encourage SOEs or new privatised firms to anticipate the changes. In contrast, the literature review mentioned the potential socio-political problems resulting from privatisation. Socio-political problems develop as SOEs and new privatised firms are required to focus on economic objectives because of changes in their market and/or owner structure. These problems are also a major consideration when the government is still part of the controlling principal through partial privatisation. New objectives are commonly set to anticipate the changes. Referring to these situations, the theory of privatisation predicts that:

H1: The introduction of new objectives resulting from the privatisation policy and the

liberalisation of the market economy cause conflicting objectives for SOEs and new privatised firms’ objectives and business activities.

H2: Changes in SOEs and new privatised firms’ objectives and business activities resulting

Chapter 5:

Research Methods

This chapter presents the research design that has been used to examine the extent to which Indonesian SOEs are a successful vehicle for achieving the government’s objectives. The research method has been created to provide detailed plans and tasks during the study and analysis process. The research method has been developed based on the knowledge gaps identified in the literature review in Chapter 2, and it will be used to develop the propositions and hypotheses. Both qualitative and quantitative methods have been employed in this thesis to examine the implications of changes and the relations between the government-stated objectives for SOEs and SOEs’ structure and performance. Qualitative methods, including interpretative, historical and content analysis, have been employed to resolve the following issues or propositions developed in the literature review:

P1: When the government introduces a new policy regarding SOEs’ roles and expectations,

the government-stated objectives for SOEs are changed.

P2: Changes in SOEs’ market economy environment through the introduction of the

privatisation policy and the liberalisation of the market economy generate changes in the government and SOEs’ objectives.

Meanwhile, quantitative methods—two-sample t-test and regression—have been employed to examine whether the introduction of new objectives resulting from the privatisation policy can cause conflicting objectives, and whether the changes affect SOEs’ business activities and performance. For this thesis, the relations between the government’s objectives and performance are examined as:

H1: The introduction of new objectives resulting from the privatisation policy and the

liberalisation of the market economy cause conflicting objectives for SOEs and new privatised firms’ objectives and business activities.

H2: Changes in SOEs and new privatised firms’ objectives and business activities resulting

from the privatisation policy improve SOEs and new privatised firms’ performance.

This chapter is developed into five subsections: historical path analysis; content analysis for evaluating the government-stated objectives; quantitative method for relations and performance measurement; unit analysis; and data analysis. Interpretive analysis is described in detail as part of the historical path and content analysis.