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Organizational
Privatization, organizational change and
change and performance: performance
evidence from Indonesia
537
Efa Yonnedi
Faculty of Economics, Andalas University, Limau Manis, Indonesia

Abstract
Purpose – The purpose of this paper is to examine the relationship between privatization of
state-owned enterprises (SOEs), organizational change and performance. It explores the processes by
which privatization affects corporate performance through the internal changes within organizations
in 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 firms
and private enterprises in Indonesia.
Findings – Cross-sectional analysis shows that there had been a statistical significant difference
across the types of ownership pertaining to organizational elements that were expected to change.
The evidence suggested that privatization brought about important alignments among the
organization’s goals, design elements and resources and between the organization and its competitive
environment.
Practical implications – The implications of the study are discussed in relation to the
organizational changes that take place in the transition from public to private sector ownership.
The study contributes to our understanding about the relationship between ownership-performance
by providing an organizational change perspective on the examination of privatization-performance
effect.
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 study

Privatization has become a global phenomenon and is still among the top priorities in the
policy agenda of developing and transitional countries. Privatization has been
conceptualized 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 services
function from the public to private sector. This includes outsourcing, contracting-out,
franchising, privatization of public finance, liberalization and the sale of state property to
the private sector (Heald, 1984; Pirie, 1985). In the narrow sense, privatization represents
the sale of state-owned enterprises (SOEs) to the private sector (Ramamurti, 2000).
The general definition of privatization, advocated by the World Bank and International
Monetary Fund, usually refers to denationalization, particularly the sale of state Journal of Organizational Change
property to the private sector, including the direct sale of the whole or parts of SOEs to Management
Vol. 23 No. 5, 2010
private agents and share issue privatizations (SIPs). This study, unless specifically pp. 537-563
stated, adopts the general definition of privatization, that is, the sale of SOEs to the q Emerald Group Publishing Limited
0953-4814
private sector. DOI 10.1108/09534811011071270
JOCM Beginning with Margaret Thatcher’s Conservative government in the UK at the end
23,5 of the 1970s, privatization rapidly and forcefully spreads over the whole world,
including Latin American and Caribbean, Sub-Saharan Africa, Asia Pacific and former
Soviet-bloc countries of Central and Eastern Europe (Hodge, 2000). The privatization
initiatives of the last 30 years have significantly reduced the role of SOEs in the economic
life of many countries. Most of this reduction occurred in developing countries in the
538 1990s. The SOEs share of “global GDP” has declined from more than 10 percent in 1979
to less than 6 percent in 2001 (Megginson and Netter, 2001).
Privatization is a vehicle for foreign direct investment (FDI). FDI flows into
developing countries grew from $23.7 billion in 1990 to $166 billion in 1998, a seven-fold
increase, helping to contribute to growth in the stock of FDI in developing countries from
5 to 20.5 percent of gross domestics product (GDP) (United Nations, 1999). Turning to the
infrastructure sector, for example, investment flows to projects with private
participation grew dramatically in developing countries between 1990 and 1997, from
about $16 to $120 billion (World Bank, 1999). The World Bank Group’s Privatization
Database showed that privatization in 62 developing countries continued to pick up in
2004 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 changes
in ownership (privatization) and corporate performance (Vickers and Yarrow, 1988;
Boardman and Vinning, 1989; Galal et al., 1994; Megginson et al., 1994; Martin and
Parker, 1997; Megginson and Netter, 2001), but it is less clear how privatization
influences 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 to
be systematically and thoroughly studied in order to gain insights into the
transformation processes of SOEs (Martin and Parker, 1997; Zahra et al., 2000; Cuervo
and Villalonga, 2000). The key argument in this paper is that only those privatization
policies that bring about positive organizational changes fundamentally different from
SOEs and suitable to a competitive market environment lead to improved firm
performance.
The aim of this study is to investigate the changes that privatization trigger within
privatized firms. The study attempts to explore three identified organizational and
managerial implications of privatization in Indonesia, namely: goals and objectives,
corporate governance practices and organizational structure. The analysis identifies
three fruitful avenues of research: first, general theoretical and conceptual frameworks
in the extant literature that associate privatization with organizational changes and
practices; second, empirical studies that examine organizational changes and practices
resulting from the privatization of SOEs in developing economy contexts; and third,
policy implications for the privatization of SOEs and the management of public
enterprises in Indonesia and developing countries.
The study is based on Indonesia’s experience in public enterprise restructuring
and privatization programs. The Indonesian SOE sector has recently undergone
restructuring and privatization programs. The choice of Indonesia as a candidate
for studying the relationship between ownership change, organizational change and Organizational
performance in a developing country is justified for a number of reasons. First, for change and
historical and economic reasons, Indonesia has built-up large SOEs, which have played a
significance role in the economy. The size, scale and scope of SOEs have expanded over performance
time since Indonesia’s independence in 1945 and they have become a central part in the
country’s development strategy. The size of public enterprise is large and accounted for
approximately 15 percent of GDP in 1995. At this time, SOEs employed approximately 539
one million employees, equivalent to 1.4 percent of the labor force (World Bank, 1994) or
equivalent to 25 percent of the Indonesia’s civil servants in 1992 (Hill, 2000). Not only
have SOEs employed the large numbers of employees, but they have also operated in
some 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 dominate
capital-intensive sectors as power, steel, chemicals and machinery (Latifulhayat, 2008;
Zhang et al., 2008). Thus, public enterprise reforms and privatization affect multiple
stakeholders including public enterprise managers, employees, the government and
society at large (Adams and Mengistu, 2008).
Second, an appropriate amount of time has elapsed since the early privatization
initiatives in 1991 to begin to explore and assess the organizational and performance
implications of privatization programs. Third, though recognizing the importance of
privatization in increasing firms’ efficiency, Indonesia has been relatively cautious in its
privatization efforts. Only six of its 125 SOEs had been partially privatized through
initial public offerings by 2003. Therefore, privatization in Indonesia is still in its infancy
and its validity as part of a long-term development strategy is still being actively
debated. 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, organizational
change and the transformation of Indonesia’s SOEs (Aswicahyono et al., 2009).
Research on the impact of privatization on organizational change and performance
would help managers understand the nature of the transformation process, taking
place during ownership change. An important by-product of privatization and public
enterprise restructuring programs in Indonesia is the growing demand for effective
managers in both SOEs and privatized firms.
The rest of the paper is structured as follows. The next section takes the form of a
review of relevant literature on organizational and managerial implications of
privatization. It presents the theoretical frameworks of the study and outlines the
general proposition of the analysis. Following this review, the methodology and
empirical findings of the study are presented together with a concluding discussion.

Theoretical framework: organizational and managerial implications of

privatization
In explaining organizational and managerial implications of privatization, there are three
theoretical foundations that have been taken from economic and organization research.
These foundations relate to agency, public choice and property rights (Vickers and
Yarrow, 1988; Martin and Parker, 1997; Hodge, 2000). These central theoretical
foundations are captured in Table I. On balance, privatization theories centrally posit that
privatization increases corporate performance (that is, the firm’s efficiency), though they
JOCM
Possible organizational and
23,5 managerial implications as
Theoretical firms move from state to
basis Contributors (among others) Central tenets private

Agency Berle and Means (1932), Goal conflicts between the Changes in managerial
540 theory Jensen and Meckling (1976) agent and the principal incentives
and Fama and Jensen (1983) Information asymmetry Changes in corporate
People’s behavior are governance
assumed Changes in control systems
Public Buchanan (1972), Niskanen Business maximize profits Less political intervention
choice (1971) and Tullock (1965) Government managers Increasing search for
theory maximize their budget efficiency
Politicians maximize their Reducing social
votes considerations
Property Alchian (1965), Demsetz The more direct and Incentives for management
Table I. rights (1966), Lindlom (1977), unattenuated are the rights Clear lines of accountability
Possible organizational theory De Alessi (1980) and to property, the better the Commercially oriented
and managerial Vickers and Yarrow (1988) assets will be used
implications of
privatization Source: Author’s compilation

say little about what happened within organizations in the search for that corporate
performance. However, privatization theories indicate potential organizational and
managerial implications of privatization, that is, the changes in managerial incentives,
corporate governance and organizational structures. The content of organizational
changes as a result of privatization is mainly unexplored.
Both agency and public choice theorists, for example, anticipate that privatization
will induce changes in managerial incentives, corporate governance and information
and control systems. Agency theorists focus on the different agency problems and
solutions to them that are available under each form of ownership. The theory argues
that the agent (management) is assumed to have a divergent goal (often conflicting
goals) with the owners (principals). The so-called “agency problems” can be more
effectively alleviated in private ownership through its most efficient information and
incentive structure (Fama and Jensen, 1983; Berle and Means, 1932).
It has been argued that private enterprises have developed better mechanisms in
solving agency problems through external control mechanisms (for example, markets
for manager, capital and corporate control) and internal control mechanisms
(for example, managerial participation in ownership, reward systems and the board
of directors) (Shleifer and Vishny, 1997). Vickers and Yarrow (1988) argue that these
control mechanisms (external and internal) are virtually absent in the SOE sector.
Cuervo and Villalonga (2000) claim that the owner-manager relationship is broken down
into two agency relationships, the first being the public as owners-to-politicians and the
second the public being politicians-to-managers, which effectively weaken the control
mechanisms.
Public choice theorists focus more on the agency problems in SOEs between the
public and the politicians. Politicians might impose political, economic and social goals
over SOEs (Buchanan, 1972; Niskanen, 1971). For the public, the cost of the state’s
monitoring of public enterprises is likely offset the benefits of state ownership of these
enterprises (Cuervo and Villalonga, 2000). This is not the case for other interest groups Organizational
such as unions and politically connected people or institutions (for example, military change and
groups 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 detrimental performance
intervention of self-interested maximizing politicians or bureaucrats.
Furthermore, property rights theorists argue that the more direct and less attenuated
are the rights to property the better the assets will be used (Hodge, 2000). For example, 541
Lindlom (1977, p. 26) stated: “Property is a set of rights to control assets”. Martin and
Parker (1997) argue that the property rights literature places heavy emphasis upon the
attenuation of property rights where public ownership exists. The basic prediction from
those who hold the property rights view of privatization is that private organizations in
which rights to profits are clearly defined will perform better than those in the public
sector where rights are diffused and uncertain (Alchian, 1965; De Alessi, 1980). It is
argued by these writers that property rights uniquely featured in private ownership
create incentives for profitability.
Therefore, central to the basic prediction of privatization theories about efficiency
improvement is the assumption that a change in ownership and the introduction of
competition will trigger significant change within the privatized firms, making them
more responsive to external demands and creating more incentives for management to
search out internal cost savings. Agency, public choice and property rights theory
provides a strong indication that privatization is likely to alter the basic elements of
SOEs, that is, the firm’s goals and objectives, corporate governance practices, incentives
structures and control, strategy and organizational structures. The impact of
privatization on corporate performance (efficiency) hinges on the changes of those
organizational 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 the
expectations presented in the conceptual framework shown in Figure 1. Overall, this
study argues that both economic theory and organization theory predict that only those
privatization policies that bring about positive organizational changes fundamentally
different from SOEs and suitable to competitive market environment lead to sustainable
efficiency improvement. Goals, corporate governance practices, organizational structure
and 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 the
following research questions:

Goal and objective

Privatization Characteristics of Corporate

- Full corporate governance performance
- Partial Figure 1.
A framework for
analysing privatization,
organizational change and
Organizational structure
performance
JOCM RQ1. Has there been a change in the organizational goals and objectives following
23,5 privatization?
RQ2. To what extent has the corporate governance practices of the firm changed
since privatization?
RQ3. What changes have been taken place in organization structure and
542 integration since privatization?

Hypothesis development
One area in which SOEs can be differentiated from the private enterprises is the nature of
their goals and objectives (Martin and Parker, 1997). In typical analyses of agency costs
in SOEs, researchers rely on the assertion that managers in SOEs focus on the objectives
of politicians, rather than maximize enterprise efficiency (Boycko et al., 1996). In SOEs,
the goals are blurred, multiple, conflicting and unstable and include both financial and
political 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 private
firms 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 may
include 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 viewed
as a business entity and the government tool to realise macro-economic objectives.
Aharoni (1986) added that in private firms, managers’ main goals are the pursuit
of long-term profits for their shareholders. SOEs are predicted to be low performers
because politicians impose objectives on them which may help them gain votes but
conflict with efficiency and customer orientation (Buchanan, 1974; Niskanen, 1971).
Following privatization, senior managers have discretion to redefine organizational
goals to reflect the objectives of their key stakeholders (Yarrow, 1986). A new dynamic
would occur by freeing political intervention and facing a new environment. This will
stipulate firms should put more emphasis on commercial activities and maximize
enterprise efficiency (Martin and Parker, 1997). The new goals may reflect a change in
power relationships in the organization (Parker, 1995). As firms move from public to
private, it is expected that privatization changes organizational mission and goals that
put more emphasis on the search for the efficiency, customer satisfaction and reduce
social consideration (Shleifer and Vishny, 1994).
In SOEs such as in Indonesia, the goals and objectives may change frequently with
consequent loss of consistency in strategic direction. This loss of strategic direction is
usually as a result of frequent changes at the top level of the organization; brought about
by shifts in policy by the political party in power or changes in the minister responsible
for the SOEs. Following the privatization process, a reduced turnover at top
management level will likely lead to some sense of stability with consequent continuity
in strategic direction. To this end, public choice and agency theorists emphasise goals
and controls as the central variables upon which the privatization-performance
relationship hinges (Cuervo and Villalonga, 2000).
In light of the above review, the following hypothesis is offered:
 H1. As firms move from public to private, the organizational goals and objectives Organizational
change toward a greater emphasis on commercial, efficiency and customer change and
focus goals.
performance
From a corporate governance view, the benefits of ownership change could be explained
in several ways. First, managers in privatized firms have to achieve a successful transfer
from public to private governance and must implement numerous policies in order to
achieve expected gains in performance (Cuervo and Villalonga, 2000). Managers should 543
develop strategies based on analysis of industry and market and technological
opportunities. Following privatization, managers are expected to have the discretion to
redefine the organizational goals to reflect the objectives of their key stakeholders
(Yarrow, 1986).
Second, the benefit of privatization can be achieved by delegating management
functions to professional managers who have the required training and knowledge at all
levels of the company. The separation of ownership and management could, however,
encourage management to be largely unaccountable to equity holders and to pursue its
own interests at the shareholders’ expense (agency costs). Privatized companies could
develop internal and external control mechanisms that reduce the losses associated with
the separation of ownership from management (Shleifer and Vishny, 1997). Internal
control mechanisms in which incentives and monitoring devices are established
encourage professional managers to act in the shareholders’ best interest. When internal
control mechanisms work well, the board of directors changes the top management as
needed in the best interest of the corporation. When internal control mechanisms are
deficient, however, external control mechanisms (through stock prices, takeovers and
relation-based control) may be used to realign managers’ interests with those of
investors (Cuervo and Villalonga, 2000).
As predicted in agency theory, control mechanisms in private firms can be expected
to be more effective than those in SOEs, since the internal control departments and
boards of directors who exercise control in private firms usually are better informed than
their counterparts in SOEs (Dharwadkar et al., 2000). The objectives of boards and
internal control departments are also more aligned to those of firm owners’ than are the
objectives of external agencies in general.
Third, the characteristics of corporate governance may change the manner in which
the government influences SOEs. It has been widely accepted that the degree of
external and political intervention in the public sector is usually higher than the private
sector. This makes SOEs very susceptible to arbitrary political involvement by
ministers, politicians and public servants. Public managers elsewhere have to report to
different ministers and inspectors. They have to consult with technical ministers for
some decisions involving huge sum of financial outlay. Their operations are scrutinized
and controlled by different agencies in the government. Some of the controls are
financial 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 a
complexity in decision making and confusion for managers. Managers of SOEs usually
have limited discretion to initiate and implement strategic changes (Martin and Parker,
1997) and are constrained by bureaucratic controls that limit their scope of activities
and authority.
Another expected shift in the corporate governance practices is a change in criteria
of the boards’ appointment. The overhaul of top-level management in the privatized
JOCM firms is expected (Martin and Parker, 1997; Cuervo and Villalonga, 2000) in order to
23,5 achieve a successful transformation from public sector mindset to private sector
culture. Managers with private sector experiences – equipped by necessary skills in
business development and venture, marketing and finance – are needed to capitalise on
market and technological opportunities. The appointment of top level management
in newly privatized firms would be based on past experience in commerce rather than
544 those with influence and political connections. In Indonesia, the president through the
Ministry of Finance has effective powers to appoint the board of commissioners and
board of directors of all SOEs. SOEs have often been used as employment creation for
politicians.
Fifth, a study by Gupta (2005) contended that in the private sector corporate
governance mechanisms often ensure that managerial behavior is monitored and
controlled through market mechanisms such as share prices, prospective investors and
the media. This may explain why SIPs can lead to a significant impact on the efficiency
of the enterprises. However, researchers have underlined that developing countries lack
market-supporting institutions. In this case, managers may rely largely on layoffs and
on increasing sales to bring companies to profitability. Even when widely dispersed and
individually weak shareholders intend to replace incumbent management, they lack the
ability to attract appropriately qualified managerial candidates, and they generally fail
to provide management with the support it needs to implement drastic turnaround in
operations and in culture (Dharwadkar et al., 2000).
Cook and Kirkpatrick (1988) pointed out a number of reasons why privatization in
the form of a change of ownership may have a significant impact on the productive
efficiency of enterprises. They concluded that the change in ownership will: first, lessen
the scope for political intervention in the operation of enterprises and simplify
objectives; second, improve the incentives for productive efficiency performance; and
third, impose the discipline of the private capital market on the enterprise, thereby
improving productive efficiency.
In relation to Indonesia on the “political intervention” point, for example, the Ministry
of Finance along side the technical minister have to approve all strategic moves such as
diversification, geographic growth, human resource management, product change and
leadership change through a bureaucratic system that foils any resemblance of
proactive strategy making. The governance of SOEs is merely a bureaucratic system,
frequently composed of administrators that emphasise control, either through the
political agenda or trivial issues such as line-item budgetary expenditures, maintenance
or procurement procedures.
To this end, privatization is expected to shift corporate governance practices as the
SOE 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 in
order to support the new organizational objectives. The level of political
influence is expected to decline in strategic decision making and board
appointments will be based on professionalism.
Successful organizations are known to be remarkably consistent in their ability to be
able to achieve a viable alignment with their relevant environment (Hamel and
Prahalad, 1994). Organizational structure that facilitates faster decision making and
integrates individuals/units in the organization is important following privatization. Organizational
Donaldson (1996) defines organizational structure as the recurrent relationships change and
between the various members of an organization. The organizational structure formally
and informally identifies: authority and reporting relationships; who has resources; who performance
is accountable for what; and how knowledge flows around the organization. It is a
central task for the organization to implement its strategy and accomplish its objectives.
Donaldson (2001) mentioned that the dominant approach to structure has been 545
grounded in contingency theory. The heart of the argument is that the best form of
structure depends upon the particular demands (contingencies) faced by an
organization. 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 is
a key component in the web of factors determining organizational performance
(Whittington, 2003, p. 323). The extent to which organizational structure might change
because of privatization remains an open debate, in fact, it has not yet been clarified in
the organizational literature. Thus, the question arises, what are the changes in the
organizational 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 controlled
bodies have politically defined structures (Parker, 1995; Martin and Parker, 1997) –
these are likely to be non-optimal after privatization. Therefore, it is expected that
as firms move from public to private, there will be a change in organizational structure
(Parker, 1995). Furthermore, drawing upon the field of managerial economics and
strategy writers, Parker contended that privatization is associated with a movement
from a functional form of organization to control inputs and outputs for the whole
organization and usually requiring activities arranged in profit or cost centres.
Privatization is associated with the move to a flattening of the managerial pyramid and
an “m-form”, rather “u-form” structure (Martin and Parker, 1997).
Furthermore, by releasing managers from politicians’ control; privatization may free
managers to exercise their latent managerial talent (Shleifer and Vishny, 1994).
Middle-level managers, for example, whose main role under state ownership was one of
mere administrative control, might find their jobs content changed as they become
responsible for implementing changes and for coordinating and motivating the teams
they supervise.
According to Zahra et al. (2000), Parker (1995) and Cuervo and Villalonga (2000)
privatized companies also change their organizational structures to ensure faster
decision making by eliminating layers of management and reducing bureaucratic
rules, and integrating individuals/units in the organization. Flatter organizational
structures, therefore, are more common in privatized companies, and they usually
facilitate communication and cooperation between individual and units. Improved
communication can strengthen employee commitment to the organization, encouraging
employees 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 decentralized
organizational structure that facilitates a faster decision-making process.
JOCM Research methods
23,5 The study was conducted in Indonesia, where the early 1990s witnessed the government
of Indonesia espousing and introducing market liberalization and privatization
initiatives. The study sought to investigate the organizational and managerial
implications of privatization through examining and comparing organizational and
managerial characteristics between SOEs, partial private/privatized firms and full
546 private enterprises. As captured in the conceptual framework, three identified potential
impacts of privatization have been selected, namely: goals and objectives, corporate
governance and organizational structure.
The findings presented in this paper were drawn from primary data from mailed
survey questionnaire results. In the absence of archival data, particularly of
organizational and managerial implications of privatization, self-reported measures are
acceptable and are often equally reliable provided that data reliability is examined
(Nath and Gruca, 1997). The questionnaire was administered to SOEs, privatized firms
and private enterprises.
Privatized firms populations were a “rare case” in Indonesia; there were only six
privatized firms until 2002, including telecommunications, bank, cement and mining
sectors. 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 letter
explaining the purpose of the study and promising confidentiality. The organizations
were offered a summary of the study on request and returned envelopes addressed to the
researcher were attached. Follow-up actions through e-mail and mail were undertaken
two weeks after the postage date if no response had been obtained. The whole process
was conducted entirely by the researcher.
The survey questionnaire contained 31 items pertaining to the organizations’ general
characteristics and the six identified generic groups: goals and objectives, corporate
governance and organizational structure, together with the three core theoretical
constructs 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-reported
performance and actual data (Dess and Robison, 1984). The “subjective” method
(self-reported performance through survey) has also been employed to capture
performance in previous studies in transitional economies (Peng et al., 2004).
The cross-sectional survey was conducted in January-July 2004. The respondents
were 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 the
impact 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 July
2004. This yielded a response rate of approximately 20 percent.
Given the difficulties of obtaining responses to mailed surveys in Indonesia and the
relative controversy of privatization concepts and implementation, the response rate
was encouraging both in terms of actual number and percentage. For example, a recent
survey study on corporate governance in Indonesia utilized responses from
66 organizations (Nam and Nam, 2004). Fahy et al. (2003) achieved a 20-percent
response 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)
used seven privatized organizations in the UK. Cunha and Cooper (2002) utilized Organizational
responses from two in the cement industry and one in the pulp industry in Portugal.
Responses and information obtained from the questionnaire survey were processed
change and
by the statistical package for social science version 13.01.1 and analyzed using both performance
descriptive and inferential statistical methods. Two pre-analysis tests were undertaken
to generalize the results of the questionnaire (non-response bias analysis) and to measure
its internal consistency (Cronbach’s Alpha). In the non-response bias test, early 547
respondents were compared with late respondents (as a surrogate of those who did not
respond to the questionnaire). After conducting the Mann-Whitney U test, no significant
difference 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 no
correlation exists between various parts of the questionnaire and 1 refers to perfect
correlation between them. Huck and Cormier (1996) indicated that 0.70 is an acceptable
level of significance for Alpha. Botosan (1997), however, indicated that 0.80 or more is
preferable. In all cases, Table III shows that the value of Cronbach’s Alpha for each
variable is over 0.70.
The unit of analysis of this study was the organization. This analysis was based on
the respondents’ perceptions of various organizational dimensions amongst SOEs,
partially privatized and private enterprises. Three levels of analysis were used in this
study:
(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 and
Wallis, 1952; Vargha and Delaney, 1998). Previous studies in the field of organizational
and business studies (Al-Khater and Naser, 2003; Bishop and Megicks, 2002;
Frank et al., 2001; Fraser and Zarkada-Fraser, 2003; Okabe, 2002) have used
Kruskal-Wallis tests.

Findings
General characteristics of the samples
The attributes of samples are reported as a percentage distribution. The type of business
and 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 investment
companies represent approximately 55 percent of the samples. Others account for
about 4-12 percent of the sample. The study covers both manufacturing and services
sectors in Indonesia.
Ownership types of organization. Of 86 respondents in 86 organizations, 31 are top
and senior managers working for the SOEs, six are senior managers working for
privatized firms and the remaining 49 are executives/management of private
enterprises. There are fewer privatized firms than the other types of organization.
This is natural in the context of Indonesia, since only those organizations privatized
JOCM
Characteristics Respondents Percentage
23,5
A. Types of industry
Agriculture 7 8.1
Mining 1 1.2
Basic industry and chemicals 16 18.6
548 Consumer goods industry 4 4.7
Property, real estate and building
construction 6 7.0
Infrastructure and transport 11 12.8
Finance 15 17.4
Trade, services and investment 16 18.6
Miscellaneous industry 10 11.6
Total 86 100.0
B. Type of ownership
State-owned enterprise 31 36.0
Privatized enterprises/mixed enterprises 6 7.0
Private enterprises 49 57.0
Total 86 100.0
C. Sales (average net sales per year)
Indonesian Rupiah (IDR) 1-100 billion 19 22.9
IDR 100-500 billion 25 30.1
IDR 500 billion-1 trillions 16 19.3
More than IDR 1 trillions 23 27.7
Total 83 100.0
D. Age of the organizations (years)
Less than ten 5 5.8
Ten to 30 41 47.7
31-50 34 39.5
More than 50 6 7.0
Total 86 100.0
E. Degree of internationalization (percentage sales sold abroad)
0 50 58.1
0-25 19 22.1
26-50 7 8.1
51-75 3 3.5
76-100 7 8.1
Total 86 100.0
F. Respondent’s position
President director 7 8.3
Director 12 14.3
Senior vice president/vice director 47 56.0
General manager 18 21.4
Total 84 100.0
G. Respondent’s education
Senior high school 1 1.2
College/D3 3 3.6
Undergraduate 35 41.7
Master 44 52.4
Table II. Doctoral 1 1.2
Organizational Total 84 100.0
and respondents’
characteristics Source: Own elaboration
before December 31, 2002 were considered in this study. There were no responses from Organizational
organizations characterized as wholly foreign owned. Furthermore, private enterprises
were listed firms in the JSX (publicly traded companies). This should be borne in mind
change and
when analyzing and interpreting the data. performance
Annual sales. Table II illustrates the size of the organization, measured by average
net sales. It shows that 27.7 percent recorded more than one trillion Rupiah for the last
five years. While about 50 percent have average net sales ranging from 100 billion to one 549
trillion Rupiah, 23 percent recorded net average sales below 100 billion Rupiah. It can be
said that most of the studied organizations have large annual sales by Indonesian
standards.
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 number
of years in business is 30, and the standard deviation is 17. Nearly, 85 percent of the
surveyed organizations had been in business for ten to 50 years. About 34 organizations
started their operation 31-50 years ago. Only six organizations had been operating for
more than 50 years.
Products sold abroad. The degree of internationalization implies greater
competitiveness and an ability to increase market size. Using the crude indicator of
percentage of products/services sold abroad, 58 percent of the sampled firms
(50 companies) sold their products/services in the domestic market only. About 19 firms
sold up to 25 percent of their products/services to foreign markets, and seven
organizations, with a high degree of internationalization, exported more than 75 percent
of their products/services. Hence, the majority of studied organizations sold their
products and services only in the domestic market in Indonesia.
Respondents’ profiles. Table II shows that 56 percent of the respondents were
categorized as a senior vice president or vice director. General managers represent
21.4 percent of the total sample, while president directors and directors are 8.3 and
14.3 percent, respectively. Top management was targeted under the assumption that this
group of managers have a comprehensive understanding about both the endogenous
characteristics and external environment of the organization. We confirmed that our
actual respondents do represent their own organizations.
Most respondents (53.6 percent) held postgraduate certificates, whilst about
42 percent had an undergraduate educational background. Thus, the majority of
respondents had experienced higher education, and more than 50 percent had studied at
postgraduate level. On average, respondents had been working in their organization
for 11.8 years. This offers some degree of assurance that they knew about the
organization they represented, and the information given is reliable, as shown by the
Cronbach Alpha value of above 0.7 (Table III).
Ownership change and organizational goals and objectives
A Kruskal-Wallis test (H Test) was performed to examine whether firms across
ownership type significantly differ in their organizational goals and objectives,
characteristics of corporate governance and organizational structure. The survey results
are presented in Table III.
Table III demonstrates that there is no significant difference across ownership types
concerning the importance attached to profitability, firms’ growth, financial stability,
employment welfare and social responsibility goals. The mean scores show that all of
these organizational goals are highly valued irrespective of ownership type.
 23,5

550
JOCM

Table III.

enterprises
Descriptive and

firms and private

managerial practices
for organizational and

across SOEs, privatized

Kruskall-Wallis statistics
Means rank for
privatization
Organizational and managerial characteristics Cronbach’s a Mean SD level K-W statistics p-value Interpretation

Goals and objectives 0.851

Profitability 5.62 0.71 1 42.50 0.538 0.764 Not Sig.
2 48.92
3 43.47
Social goals 5.65 0.63 1 39.97 1.123 0.570 Not Sig.
2 47.67
3 45.22
Efficiency and cost effective 4.91 1.08 1 37.19 6.630 0.042 Sig.
2 58.00
3 45.71
Firms’ growth 5.15 0.86 1 40.55 1.214 0.545 Not Sig.
2 39.67
3 45.84
Financial stability 5.58 0.66 1 39.98 1.379 0.502 Not Sig.
2 48.17
3 45.15
Employees welfare 5.34 0.78 1 42.11 0.218 0.897 Not Sig.
2 46.17
3 44.05
Customer focus (product/services quality) 5.53 0.57 1 37.32 6.103 0.047 Sig.
2 55.50
3 45.94
Decision-making process 0.716
The importance of the government in decision-making
process 3.94 1.82 1 61.24 27.49 0.000 Sig.
2 46.67
3 31.89
The importance of union organization in decision-making
process 3.84 1.23 1 43.10 0.079 0.961 Not Sig.
2 45.50
3 42.63
The importance of boards in decision-making process 5.37 0.80 1 47.19 4.664 0.097 Not Sig.
2 57.25
3 39.48
(continued)
 Means rank for
privatization
Organizational and managerial characteristics Cronbach’s a Mean SD level K-W statistics p-value Interpretation

Boards’ appointment
The importance of business networks, skills and
experiences in appointing boards 5.01 1.20 1 32.69 10.077 0.006 Sig.
2 54.67
3 48.97
The importance of reputation in appointing boards 4.99 1.21 1 33.60 9.317 0.009 Sig.
2 56.50
3 48.17

The appointment of Ministry of Badan Usaha Milik

Negara for boards 3.04 2.11 1 66.48 56.586 0.000 Sig.
2 54.25
3 26.43
Organizational structure and integration 0.715
Roles and function of employees are clearly defined 5.17 0.74 1 46.50 0.891 0.640 Not Sig.
2 42.50
3 41.72
Regulation and procedures are in place for employees to
perform 4.81 1.01 1 48.19 5.164 0.075 Not Sig.
2 20.42
3 43.36
Information and helps are made available not only for
particular employees 4.53 0.89 1 45.65 0.420 0.811 Not Sig.
2 41.25
3 42.42
Organizational structure are flatter and more
decentralised as compared to the last five years 4.48 0.95 1 34.60 7.397 0.025 Sig.
2 49.50
3 27.44
How often coordination among units and functions 4.97 0.83 1 31.71 0.216 0.717 Not Sig.
2 35.88
3 31.76
Performance 0.879
Profitability (after-tax return on sales/ROS) 3.61 1.11 1 37.82 5.543 0.054 Sig.
2 58.83
3 44.36
(continued)
Organizational

performance
change and

Table III.
551
 23,5

552
JOCM

Table III.
Means rank for
privatization
Organizational and managerial characteristics Cronbach’s a Mean SD level K-W statistics p-value Interpretation

Investment/total assets 3.44 1.14 1 37.98 2.417 0.306 Not Sig.

2 50.17
3 45.34
Market share (competitive position in the industry) 3.36 0.82 1 37.92 2.020 0.375 Not Sig.
2 41.92
3 45.44
Number of employment 3.13 1.00 1 36.19 5.637 0.057 Sig.
2 35.67
3 48.31
Products and services quality (i.e. competitive advantage
in product design, after sales/services, technical product/
services capability) 3.82 0.72 1 34.66 6.781 0.040 Sig.
2 50.17
3 47.49
Notes: 1 – SOEs; 2 – privatized firms; 3 – private enterprises
Source: Own elaboration
However, the organizations had statistically significant differences in the mean rank Organizational
regarding the importance assigned to the “efficiency and cost control” goal (H ¼ 6.630, change and
p , 0.05) and “products” quality and customer services’ (customer focus) goal, with H
statistics of 6.103 and p , 0.05. The results suggest that the managerial incentives for performance
efficiency and customer orientation were systematically higher in the privatized and
private enterprises as compared to those for the SOEs. However, the pronounced
difference in efficiency and cost-effective goals exists between privatized enterprises 553
and SOEs. Privatized enterprises have a mean score of 6 on a scale of 6, while SOEs have
a mean score of 5.39 on a scale of six. This is also evident in the products and quality
goals where a significant difference exists between privatized enterprises and SOEs.
The survey results validate the H1 that as firms move from public to private, the
managerial emphasis on efficiency, cost reductions and customer orientation increases.

Ownership change and corporate governance

The characteristics of corporate governance covered in the survey were the audit
committee and its independence of management, related party transactions, political
interference on decision-making process and the appointment of board members.

Audit committee
The role of the audit committee is crucial to develop internal and external organizational
control mechanisms to reduce the risks of mismanagement. Table IV exhibits a
significant difference in the existence of audit committees between SOEs, partially
privatized 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 this
case is met when at least one of the three members of the audit committee is independent
of management, with no ownership and conflicting interests. The majority of managers

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

Audit committee 1 64.5 35.5

2 0.0 100
3 0.0 100
Pearson x 2 ¼ 46.237, p ¼ 0.000
Independence of the audit committee (at least one of the 1 70.4 29.6
three members of audit committee is independent of management) 2 0.0 100
3 6.3 93.8
Pearson x 2 ¼ 38.328, p ¼ 0.000
Firms have contract with directors or relations which promote 1 87.1 12.9
conflict of interest 2 80 20
3 95.8 4.2
Pearson x 2 ¼ 2.829, p ¼ 0.243
Firm gives loan in the subsidiary companies 1 80.6 19.4
2 50 50
3 57.1 42.9
Pearson x 2 ¼ 5.266, p ¼ 0.072
Table IV.
Notes: 1 – public; 2 – partial private; 3 – private Some characteristics of
Source: Own elaboration corporate governance
JOCM in privatized and private enterprises (over 93 percent) indicated that the audit committee
was independent of management and responsible to the boards of commissioners
23,5 (Table IV).
The management of SOEs, which have an audit committee, indicated that the
independence of the audit committee was seriously undermined: 70 percent of
respondents said that the audit committee was not independent of management.
554 As indicated by the Pearson x 2 test, there is a significant difference pertaining to the
independence of audit committee across ownership type.

Related party transactions

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

Political interference
Based on Table III, two findings are of special interests. First, there is a significant
difference across ownership types regarding the importance of the government in the
strategic decision making (H ¼ 27.49, p , 0.005). The mean rank column shows that
SOEs had the highest mean rank, while private enterprises reported the lowest. This
indicates that the SOEs’ strategic decision making is highly political and influenced by
the government.
Second, regarding the degree of importance attached to the boards’ appointment
criteria (Table III), there are significant variances across ownership types in such criteria
as “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 improved
corporate governance characteristics in order to support the new organizational
objectives. The level of political influence was declined in strategic decision making and
board appointments were based on market criteria or professionalism.

Ownership change and organizational structure

K-W Statistics (Table III) reveal no significant differences across various type of
ownership with respect to the openness of internal communication and cooperation
between individuals and units. Openness of internal communication and cooperation
between individuals and units is highly rated by the respondents irrespective of
ownership type. The respondents are of the opinion that roles and functions are clearly
defined; regulation and procedures are in place for employees to perform; information
and help are made available for all employees.
However, pronounced differences were observed pertaining to the organizational
structure, with H statistics of 7.937 ( p , 0.05). The question concerned the flatness and
decentralization of the organizational structure. An inspection of the mean rank shows Organizational
that privatized enterprises recorded the highest, while private enterprises reported the change and
lowest. The finding supports H3, that privatization leads to a flatter and decentralized
organizational structure. performance

Ownership change and corporate performance

Table V reveals the proportion of firms reporting an increase and significant increase in 555
their corporate performance against the firms’ close competitors over the last five years.
Across all types of performance indicators, improvements are recorded in the
privatized enterprises, partly indicating the important role of privatization in enhancing
corporate performance. For example, the proportion of privatized firms that reported an
increase in profitability (80 percent) was significantly greater than for SOEs
(58.1 percent). However, it is also evident from Table V that privatization is associated
with a decline in the total number of employees. Only a third of privatized firms reported
an increase in the number of their employees in their post-privatization era. It is also
interesting to note that the proportion of privatized firms recording a significant increase
in their performance was slightly greater than for private enterprises, except for the
variables number in employment and products/services quality.
Furthermore, the Kruskal-Wallis tests (Table III) show that firms significantly
differ across ownership types in profitability, number in employment, products and
services and quality performance relative to competitors over the last five years. There
are no significant variances across privatization levels with respect to “investment/total
assets” and “market share relative to competitors” over the last five years.

Discussions
This research provides insight into how organizational changes that accompany
privatization process influence the financial performance of privatized firms. The study
found pronounced variations between public and privatized enterprises in the importance
attached to efficiency, cost effectiveness (cost control) and customer-focused goals.
Managerial incentives were increased after privatization in the search for efficiency, cost
control and improvement of product and service quality. This was especially true in
privatized firms, for example, telecommunication companies (Telkom Indonesia), where
there was a shift from “engineering excellence” to “customer excellence”. From the public
service mentality of government departments and the dominance of technical experts,
privatized firms went through significant changes in the number and structure of
employees, and radical transformation of management systems towards
customer-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 81.5

Investment expenditure 51.6 83.3 55.1
Market share 35.5 50.0 49.0
Number of employees 32.2 33.3 51.0 Table V.
Products/services quality 58.1 66.7 75.5 Corporate performance
across ownership
Source: Own elaboration type (%)
JOCM SOEs in Indonesia have been generally characterized by inefficiencies because of
23,5 overstaffing, dependence on subsidies, absence of competition and poorly managerial
incentives. Therefore, cost savings and efficiency behavior were the most frequently
observed sources of performance improvement after privatization.
The effects of privatization on the characteristics of corporate governance were
found to be significant in relation to perceived improvements to both the external and
556 internal control mechanisms of organizations. Significant differences were found in
corporate governance practices between SOEs and privatized enterprises, particularly
in terms of the existence of audit committees that were independent from management.
Furthermore, privatized and private enterprises were more likely to disclose company
information, 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 the
responsibility for strategic direction and commercial performance, with incentives
based on commercial performance indicators. All of these changes led to increased
managerial discretion in the entrepreneurship transformation.
Undoubtedly, the role of an audit committee is crucial, particularly after the
economic crisis of 1997-1998, as recognized by Indonesia’s National Committee on
Corporate Governance (1999). In January 2005, NCGP embarked on a strategic plan to
revamp all SOEs, financial service providers and private and public companies and to
devise codes of conduct, ensure implementation, recommend regulatory
improvements and provide management assessment procedures using World Bank
and organization for economic cooperation and development benchmarks. When an
audit committee is present, privatized and private companies are more likely to be
able to develop the internal and external control mechanisms that reduce losses
associated with the separation of principals from agents. Internal control mechanisms,
in which incentives and monitoring devices are established, encourage professional
managers to act in the shareholders’ best interest (Shleifer and Vishny, 1997). It is
evident in this study that political interference and weak internal and external control
mechanisms have been complicated by the absence of an audit committee in the
majority of SOEs.
Furthermore, based on Indonesia’s security exchange commission regulation, the
auditing firms (external auditors) can only audit firms that have traded their shares on
the stock exchange (that is, the privatized firms and private enterprises) for a maximum
of five years. If there is no auditing period limitation, some auditing firms might collude
with their clients’ management to improve their chances of continuing the auditing
services (Nam and Nam, 2004). A five-year maximum regulation has improved the
reliability and independence of auditing by external auditors in privatized and private
enterprises. Nevertheless, there has been no legal requirement for SOEs to have an
external auditing period limitation.
The quality of corporate internal controls and supervising process in the private and
privatized firms, as indicated by the presence of an independent audit committee, is
relatively stronger than those in SOEs. Privatization is associated with the improvement
of corporate governance practices as implied by the internal controls and supervising
process dimensions.
 Approval and disclosure are needed in relation to related party transactions in the Organizational
case of those amounting to at least 10 percent of corporate revenue or 20 percent of equity change and
for both private and privatized enterprises.
As noted earlier, privatization changes both the decision-making process and the performance
degree 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 the
operation of the enterprises and to simplify the objectives (Cook and Kirkpatrick, 1988). 557
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 implement
strategic changes. The result suggests that as firms move from public to private, the
forms of political influence are systematically reduced. It would be wrong to say that
there 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 government
the right to veto major decisions pertaining to “very crucial issues”. This is one form of
political influence. However, because of the privatization method chosen (SIPs), the stock
market can play a role in which the company has to disclose any material issues
regarding the company’s operation. Stock Exchange (Badan Pengelola dan Pengawasan
Pasar Modal ) regulations to some extent constrain the government’s political influence.
The results suggest that the boards’ appointment in privatized firms is based on
professionalism criteria such as business reputation, experiences, business networks
and skills. These criteria are believed to be a secondary factor, if not non-existent, among
the SOEs. It has been widely accepted that the directors and commissioner’s
appointments in SOEs are not based on merit but rather on the basis of political
connections and “cozy” relationships between government figures and management.
This is evident by the influence of the Ministry of SOEs in the board’s appointment for
which SOEs had the highest means, while private enterprises reported the lowest. This
also reinforces the findings of previous studies (Robison, 1986; Mardjana, 1993).
The findings provide support for the notion that privatization lessened the scope for
political influence and interference by government in the decision-making process and
appointment of company boards. This is consistent with one of privatization’s rationales
in developing countries, that is, giving more autonomy to management to manage
(Cook and Kirkpatrick, 1988).
Structural organizational changes resulting from privatization were found in this
study. As firms moved from public to private, organizational structures tended to
become flatter, more organic and decentralized, and to move to a matrix form
of structure in order to facilitate organizational integration and fit with environmental
factors. The respondents also reported improved communication and coordination
among individuals and units following privatization as organizations moved towards
reducing bureaucratic rules and rigidities. Notably, changes in organizational structure
following privatization were not just seen as a continuous process; they were also seen
to be multi-dimensional in nature (Erakovic and Wilson, 2005).
First, the organizations significantly decreased their overall size. Most privatized
firms reduced the number of employees and the size of organizational units. Next, those
units or operations which were not considered part of the core business, or which were
relatively unprofitable, were outsourced. Last, organizations reduced their number of
JOCM hierarchical levels. Through various transitional stages, structures were flattened
23,5 dramatically, leaving only four to five levels in operational areas.
As noted previously, the organizational structure changes were to be anticipated. As
privatized firms are subject to market pressures and are forced to become more efficient
and cost effective, organizational structures that ensure faster decision making,
eliminate layers of management and reduce bureaucratic rules are crucial. These finding
558 provide evidence from the Indonesian context that flatter and more decentralized
organizational structures are more common in privatized companies than in SOEs, thus
supporting similar findings obtained in other contexts (Gowland and Aiken, 2003;
Martin and Parker, 1997).

Corporate performance
The respondents tended to be of the view that Indonesia’s privatization program has had
a positive effect on corporate performance. Respondents indicated that privatization had
produced a significant increase in the overall profitability and quality of
products/services as measured by competitive advantage in products design,
after-sales and technical product/service capability. However, there was a greater
tendency to significantly reduce the number of employees among privatized and SOEs
than in private enterprises. Again, these findings from Indonesia generally support the
findings of other researchers such as Yarrow (1986), Megginson et al. (1994) and Martin
and Parker (1997). Martin and Parker found that performance improvements
are 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 enterprises
reported the lowest. Second, privatized firms had the lowest means rank with regard to
the number of employment, while private enterprises reporting the highest. This implies
that privatized firms had systematically experienced the decline in the number of
employment following privatization. In the Indonesia’s telecommunication industry, for
example, after privatization employees were reduced from 42,170 employees in 1994 to
34,678 employees in 2002 (Telkom, 1994, 2002).
However, systematic reduction in the employment also occurred in the SOEs as part
of business restructuring process in the government SOEs’ revitalization program. Both
SOEs and privatized had experienced staff redundancies as a result of privatization and
government revitalization programs in the SOEs. Another factor contributing to staff
redundancies is macro-economic instability resulting from the economic crisis unfolded
in the mid-1997 whereby firms reduced the number of employment. Third, in relation
to products and services quality, it is obviously shown that privatized firms had the
highest mean rank and conversely, public enterprises reported the lowest.
Finally, the managerial perceptions relating to product and services quality
significantly differ between privatized companies and SOEs. The management
perception regarding products and services quality of privatized firms as measured by
the competitive advantage in product design, after sales/services, technical
product/services capability dimension were significantly higher for the privatized
companies. Overall, the results suggest that the managers perceive that privatized
firms tend to perform better than SOEs with respect to profitability and products and
services quality.
Conclusions Organizational
The key finding of this study is that privatization brought about major changes in the change and
organizational goals, corporate governance and organizational structure of privatized
firms. These changes transformed privatized firms that fundamentally different from performance
SOEs and suitable to a competitive market environment. These positive organizational
changes led to significant performance improvement. Changes in ownership structure,
from public to private, alter the behavior, incentives and performance of managers and 559
organizations. The study contributes to our understanding about the relationship
between ownership performance by providing an organizational change perspective on
the examination of privatization-performance effect.
The findings highlight specific organizational changes that take place in the
transition from the public to the private sector. As such, the findings could be used to
prepare managers of SOEs to take steps to manage newly privatized firms. This finding
reflects the importance of leadership and participation in the privatization and
restructuring processes. This study highlights the need for human resource
development management and training programs in all developing and transitional
economies, targeting the managers of newly privatized firms (Metcalfe and Rees, 2005).
The content of that training and development could be informed by further research into
the leadership and management challenges arising during the privatization and
restructuring programs.

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Corresponding author
Efa Yonnedi can be contacted at: yonnedi@fekon.unand.ac.id

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