Code of Conduct for SME in Bali and Makasar Indonesia: An Experimental Research

Code of conduct (COC) for SME, before getting big, is very importance to Good Corporate and doing clean business in the global environment. It finds that entrepreneurs are not guided by any specific code of conduct, and must decide for themselves what is right (Robinson and Mescht).

Indonesia Business Link (IBL) developed and guided of COC complies with the International Rule and generally accepted such SA 8000. 1. The objectives of the researches are to measure the effectiveness the socialization of COC done in the class. 2. Samples that be used are in Bali (24 respondents) and Makasar (33 respondents) for export oriented SME. 3. This researches are conducted in 31 Maret 2011 in Bali and 28 April 2011 in Makasar. 4. The finding is that code of conduct can be socialized.

By experimental research (Campbell and Stanley) can be seen that pre and post test conducted during socialization increase significantly the understanding of the Code of Conduct. After understanding of COC, it is hoped that cleaner and more proper business will be conducted by SME. The activities also will be replicated to the other city of Indonesia.


a. Objective and Research Question
Developing the code of conduct for SME will be very valuable to increase the ethics with compliance International conduct to develop SME. The question is that socialization of the code of conduct that already systematized and guided can increase awareness of the SME in COC.

b. Motivation behind the study
Successfully this research will have impact to find a way in disseminating code of conduct systematically and planed. Ethics problem will be reduce systematically through COC socialization in order to compete for SME in the global and international business competition.

c. Research reason
Indonesia is the 100 ranking of the corruption according Corruption Perception Index 2011 that considered very low. Therefore, the research related with this data is very important. Code of Conduct is the one way among the many ways can be done. The socialization of COC to SME becomes very important.

table 1 SME

d. A statement explaining that the research findings are different from previous studies
Robinson and Mescht describe that entrepreneurs choose a particular way of life with the dual aim of maximizing profit and gaining a sense of self-satisfaction. In these endeavors, entrepreneurs typically live with the threat of competition and the risk of business failure, while attempting to do their best within the limitations of their resources.

This qualitative study first examines existing theories of ethics and ways of applying business ethics and thereafter investigates entrepreneurs’ actual experiences by means of in-depth interviews and the use of phenomenology.

It finds that entrepreneurs are not guided by any specific code of conduct, and must decide for themselves what is right. It describes the entrepreneurial business ethic, some of the types of dilemmas that they experience and the methods that they have developed to deal with the dilemmas.

In this study, guided COC are prepared in order to fastening the process of understanding of the COC to SME. By the socialization, the awareness of the COC will be attained systematically.


a. Relevant past studies
Hannafey states that during the past twenty years, there has been explosion of new interest in entrepreneurs and their activities. Yet only recently has serious research attention been devoted to the ethical problems encountered by entrepreneurs and their organizations. Entrepreneurs face uniquely complex moral problems related to basic fairness, personnel and customer relationships, distribution dilemmas, and other challenges. That there is “endemic corruption on our continent” (Rossouw 2002:11) has been well documented.

Recent research suggests that “specific characteristics of the formal ethics and legal compliance program matter less than the broader perceptions of the program’s orientation toward values and ethical aspirations.” This research found that two factors are most important:

(1) that ethics is perceived to be important to leadership from executive through supervisor and

(2) that employees believe they are treated fairly. It is particularly important that enterprise policies and management actions be consistent and that reward systems support ethical behavior.

According to the research, familiarity with a code of conduct is relatively unimportant. Moreover, a program perceived as designed primarily to protect senior managers is clearly harmful and is associated with increased violations of its established standards and procedures.

Research and experience over the past 15 years suggest that a primary best practice is to design a business ethics program that goes beyond mere compliance. Promote, where necessary and appropriate, the establishment of codes of conduct for SME lending by banks.

A review of the literature indicates that a few studies have examined the value orientations and ethical stances of Indian managers in large corporations (Monga, 2004; Fisher, Shirole & Bhupatkar, 2001).

One study empirically examines the cultural influences on the judgment of Australian, Malaysian and Indian SME managers to whistle blowing as an internal control mechanism (Chavan & Lamba, 2007).

There is however, no discussion in the paper about the significance of the choice of SME managers. Since the findings are at the level of cultural influences, the SME managers appear to be just a sample, with no specific behavioral uniqueness attached to them.

b. Problem Statements was not answered
To be effective over time, a business ethics program must be a formal plan, because it touches on all aspects of the enterprise—operations, human resources, communications, and marketing to name but a few. Formally planning a business ethics program ensures that owners and managers give due consideration to the enterprise’s relevant context, organizational culture, and reasonable stakeholder expectations.

The problem was not clearly answered in developing the formal guide of COC to the organization especially for SME. The study include what factors are included in COC guide and how effective the COC for SME program to be socialized.

c. Hypotheses
Referring to the guide of COC and the ethnic group in understanding of code of conduct hypothesis can be developed. Hypothesis 1: Socialization of code of conduct by using systematic guided in the class will differ significantly effective comparing before and after socialization. Hypothesis 2: The ethnic groups (Makasar and Bali) of the participants will differ significantly in accepting the socialization of the code of conducts.


a. Research process and hypothesis
As the above mention, two hypotheses are developed referring to the guide of COC and the ethnic group in understanding of code of conduct.

Hypothesis 1:
Socialization of code of conduct by using systematic guided in the class will differ significantly effective comparing before and after socialization.

Hypothesis 2:
The ethnic groups (Makasar and Bali) of the participants will differ significantly in accepting the socialization of the code of conducts.

The second hypothesis was developed do to the pluralism of Indonesia, with so many ethnic groups.

b. Data Study
The Guide of code of conduct was prepared by Indonesia Business Link (IBL) and in general the highlight steps of process consist of:

  • Compilation and analysis of Code of Conducts , Business Principles and the like as well as Law and Regulations valid in Indonesia and local wisdom which has relevancy with SMEs
  • Focused group discussion among relevant stakeholders
  • Drafting and reviewing an acceptable and universal CoC among relevant stakeholders
  • Finalizing draft of “Model CoC for SMEs” based on comments from International Agencies
  • Drafting and finalizing a Guideline on How to Develop CoC for SMEs
  • Socialization of the CoC for SMEs, Guidelines on How to Develop CoC for SMEs and workshop materials among relevant target groups

In this study, the socializations of COC were done in and Bali 31 Maret 2011 and Makasar 28 April 2011 in Indonesia for SME with export oriented. The socialization was in 3 hours in every city.

c. Contribution of body of knowledge

Code of conduct can be developed systematically. Socialization can be used to improve the understanding of the ethic and good corporate. The content of COC as follow: Indonesia Business Link (IBL) states that with regionalization and globalization being inevitable, and Indonesia becoming an active part of various multilateral economic partnerships like AFTA and APEC, beside its standing membership of International organizations like the UN, WTO, IMF/WB, Indonesia has to comply with its international commitments.

Besides, the global market also requires that all players need to be at a level playing field, meaning to abide by global standards. Indeed the phenomenon opens opportunities, but at the same time poses a challenge for Indonesia.

Therefore, definitely an acceptable Code of Conduct (CoC) for this important SME sector is the answer if Indonesia really wants to get a reasonable share within the regional and global market and economy which is now highly based on global criteria and standards.

With its mission and its awareness of the above, IBL has decided to take the challenge of developing an acceptable and universal CoC for SMEs in Indonesia, which would strengthen their Good Corporate Government (GCG) collaboration with CIPE America. In the process attempts would be made to learn and seek inspiration from available relevant documents as well as from local wisdom.

However, considering the present condition of the SME sector in Indonesia, the CoC developed is expected to be applicable in a gradual fashion for different SMEs in different stages, in meeting the increasing demands and requirements within the global context (with considerations in mind to the progress of our neighboring countries in Asia region).

Normative Elements

IBL did the compilation of Code of Conducts, Business Principles and the like as well as Law and Regulations valid in Indonesia and local wisdom which has relevancy with SMEs. The basic normative elements being used in preparing this Code of Conduct are based on relevant national National Labour Laws, Environmental Laws and Business Ethics Practices, ILO Conventions and the UN Declaration on Human Rights (UNDHR) and Social Audit 8000.

Compliance Requirements:

1. Working Hours
Companies and factories shall comply with working hours, including overtime hours under Indonesian Labour Act No: 13/2003 Chapter X, Subsection 4, Articles 77 – 85:

a) 7 (seven) hours a day and 40 (forty) hours a week for 6 (six) workdays in a week; or
b) 8 (eight) hours a day, 40 (forty ) hours a week for 5 (five) workdays in a week;
c) Maximum overtime work is 3 (three) hours in a day and 14 (fourteen) hours in a week.
d) Above provisions of working hours do not apply to certain sectors (see relevant Ministerial Decision).
e) The weekly period of rest is 1 (one) day after 6 (six) workdays in a week or 2 (two) days after 5 (five) workdays.
f) Deviations from above arrangements have to be reported and approved by the Department of Manpower or Local Manpower Offices. Above requirements are also in line with ILO Conventions Nos: 1, 30, and 63 concerning Working Hours.

2. Compensation

Companies shall comply with the set of minimum wages, including all the benefits, social security schemes as established by the government (provincial and district/city based regulations) that are aiming in meeting the needs of a decent living condition

Overtime must be paid in accordance with the set formula as specified under Labour Act , while overtime work should not become compulsory

Above requirement is based on Ind. Labour Act No: 13/2003 Section Two, Articles 86 – 98 ( concerning Wages ) and Section Three, Articles 99 – 101 ( on Welfare. ) and Indonesian Act. No: 40/2004 on Social security. Those requirements are in line with ILO Conventions Nos: 63, 95 and 131 on Minimum Wages.

3. Health and Safety
Companies shall provide the workers with a safe and healthy working environment. Factories must be sufficiently lighted and ventilated, aisles accessible, machinery maintained and hazardous materials sensibly stored and disposed of. A workable safety management system must be in place to detect, avoid or respond to potential threats to the health and safety of all personnel. Proper safety training for all the personnel must be part of the safety and health management system of the company.

This requirement is in line with Labour Act No: 13/2003, Chapter X, Section 5, Articles 86 – 89 on Occupational Safety, Indonesian Labour Act No: 1/1977 on Occupational Safety and ILO Conventions Nos: 155 and 162 on Occupational Safety and Health. Other relevant Safety and Health Laws covering specific operations must be taken into consideration.

4. Non Discrimination and Equality
Employers shall not conduct any discriminatory practices at work places on grounds of race, colour, sex, religion, political affiliation or social origin Equal opportunity and treatment should be provided to both male and female workers in recruitment, training, promotion, including equal pay to both for equal value of work.

Above requirement is in compliance with Ind. Labour Law No: 80/1957 and ILO Convention No: 100/1951 on Equal Remuneration and Ind. Labour Act No: 21/1999 and ILO Convention 111/1958 on Non Discrimination in Employment and Occupation.

5. No Child Labour
Employers shall not employ under aged children and must strictly comply with Labour Act No:20/1999 on Minimum Age for Employment and Act No: 1/2001 on the Elimination of Worst Forms of Child Labour, also based on Ind. Labour Act No: 13/2003 Chapter X, Section 2, Articles 69 -75 that exception may be made for the employment of children aged between 13 (thirteen ) years old and 15 (fifteen) years old for light work to the extent that their work does not disrupt their physical, mental and social development.

Those requirements are also in line with ILO Convention No: 138 (on Minimum Age) and ILO Convention No: 182 ( on the Worst Forms of Child Labour) which both have been ratified by the Government of Indonesia.

6. No Forced Labour
Companies shall not engage in any type of forced labour practices, including the withholding of workers’ original identity cards, education certificates, passports and payments which can be considered as an act of bondage. Copies of those documents can be kept in companies’ files after checking the authenticity of those documents.

Companies practices should be in line with Indonesian Labour Act No: 19/1999 on the Implementation of ILO Convention No: 105 (Abolition of forced Labour) and Indonesian Act No: 1/2000 on ILO Convention and UN Convention on Abolition of Forced Labour.

7. Freedom of Association and the Right to Collective Bargaining
The workers have the right to form and join trade unions of their choice, and the company shall ensure that those workers belong to the trade unions are not the subject of discrimination. The workers through their trade unions have the right to bargain collectively with the employers in setting the terms and conditions of their employment. In case there is no trade union in place due to genuine choice of the workers, then the company shall facilitate the establishment of a parallel means that would represent the workers.

Other requirements should be in line with Ind. Labour Law No: 21/2000 on Trade Union/Labour Union Act and This Labour Act is in compliance with ILO Convention No: 87/1948 concerning Freedom of Association and the Rights to Organize which has been ratified by the Government of Indonesia and Indonesian Labour Act No: 88/1956 concerning Protection Against Anti Union Discrimination for Workers and Employers Organizations against Acts of Interference by Each Other and for Measures to Promote Collective Bargaining. Also the Government of Indonesia has ratified ILO Convention No: 98/1949 on The Rights to Organize and Collective Bargaining.

8. Considerations for the Environment
Companies shall comply with all applicable environmental laws and regulations (Indonesian Act No: 21/1997 on Environmental Management) and companies must ensure that there is a workable waste management system in place so that waste disposal from the factories is safe and that surrounding areas are not affected.

9. Considerations for the Consumer Protection
Companies shall comply with applicable laws and regulations related to consumer protection (Indonesian Act No: 8/1999 on Consumers’ Protection). Companies shall not use unsafe/unhealthy or illegal materials in the production process that would affect the safe use of their products by consumers, and be truthful and fair in communicating information to the consumers.

10. Considerations for Intellectual Property Rights
Companies shall comply with applicable laws and regulations related to Intellectual Property Rights (Indonesian Act No: 19/2002 on Intellectual Property Rights). Consequently, companies must follow the relevant Government Policies related to Intellectual Property Rights issued by the Directorate General for Small and Medium Industries – Department of Industry 2007, particularly on Trade Related Aspects of Intellectual Property Rights (TRIP).

Governance Requirements:

Basically companies should behave responsibly towards all its stakeholders and conduct business in an ethical manner; building upon trust, honesty and mutual respects.

1. Responsibility

Basically, companies should make sure that its corporate social responsibility is toward all its stakeholders instead of exclusively toward shareholders. Specifically,

  • To the shareholder, companies should demonstrate stewardship of their shares
  • To the customers, companies should only sell products which are produced responsibly, made of only acceptable materials and safety tested, and providing good values for money; as well as communicating information truthfully and fairly
  • To the employees, companies should provide employment which abides by law with due consideration to following local wisdom
  • To the environment, companies should comply with all applicable environmental regulations
  • To the surrounding community, companies should contribute fairly, as expected by local wisdom

2. Accountability

Basically, companies should reflect accountability of their responsibilities in the form of

  • Documentation: maintaining on file accurate documentation as needed to demonstrate compliance with the CoC and made it available for required inspection
  • Reporting: preparing required accurate reports based on all documentation of companies activities in a transparent manner

3. Transparency

Basically, transparency in the business behaviour should be applied at any level and activities, specifically in

  • Communications with all stakeholders, verbally as well as in writing
  • Reporting as required (financial, administrative, production and HR related, taxation related)

4. Fairness

Basically, fairness in the business behaviour should also be practiced to all stakeholders, specifically

  • To shareholders: give first priority to the interest of company and not engage in any conduct which would involve conflict of interests
  • To consumers : charging value for money for its products and communicating truthfully and fairly
  • To employees: providing remuneration at market rate or at least minimum allowed by regulations
  • To suppliers: paying price at market rate
  • To competitors: not practicing inappropriate unfair competition

To relevant stakeholders: not engaging in bribe or facilitation payments

d. Model
The process of the activities can be draw as follow:

table 2 SME

The simple of theoretical frame work is focusing the ethnic groups due to the multicultural of Indonesia.

d. Justification of sample and method

Samples are applied by purposes method. Two cities were chosen for thus research in the centre of Indonesia, Makasar and Bali. The participants come from the Association of Exporter in the both cities. 40 participants were invited due to the limited capacity of class, however data from all participants can not be analyzed, because it is not complete test between pre and posttest are participated. This socialization of COC are in Makasar (33 respondents, 28 April 2011) and Bali (24 respondents, 31 Maret 2011) Indonesia for SME with export oriented. The socialization was in 4 hours respectively.

Experimental research designs (Campbell and Stanley) are used for the controlled testing of causal processes. The general procedure is one or more independent variables are manipulated to determine their effect on a dependent variable. These designs can be used where:

1. There is time priority in a causal relationship (cause precedes effect),

2. There is consistency in a causal relationship (a cause will always lead to the same effect).

Classical Pretest-Posttest Design will be used that is One Group Pretest-Posttest Design. No control group is assigned. The sample is not randomly assigned. There are sources of threat to internal validity. They are; History, Maturation, Repeated Testing, Instrumentation, Regression to the Mean, Selection-Maturation Interaction, Experimenter Bias.

Four factors jeopardizing external validity or representativeness are:

1. Reactive or interaction effect of testing, a pretest might increase.

2. Interaction effects of selection biases and the experimental variable.

3. Reactive effects of experimental arrangements, which would preclude generalization about the effect of the experimental variable upon persons being exposed to it in non-experimental settings. The training tended to be single treatment.

table 3 SME

e. Improved the previous study

This research improved two factors. First, using experimental research (Campell and Stanley), effectiveness of the socialization can measured. Second, guide of COC has been made systematically and it can be disseminated widely.


a. Findings

The questionnaire as pre and post test is including some important aspects of the code of conducts.

table 4 SME

b. Analysis of Hypothesis
In the experimental design, pre and post test were applied the result can seen as below.
Hypothesis 1:
Socialization of code of conduct by using systematic guided in the class will differ significantly effective comparing before and after socialization.

This hypotheses is accepted and the mean of the score increases from 6.1190 to 8.7857

table 5 6 SME

Hypothesis 2:
The ethnic groups (Makasar and Bali) of the participants will differ significantly in accepting the socialization of the code of conducts.

The hypothesis is accepted. Even both ethnics significantly received the concept of code of conduct, Bali ethnics has the higher points compare to the Makasar. This difference between Makasar and Bali is that Bali is more International place comparing with Makasar. However the significant is slightly only difference with 0.046 from the maximum 0.05 degree of confidence level.

table 7 8 SME


a. Originality

This activities show that code of conduct can be socialized and in this activities for SME is very important before the SME getting big. After understanding of COC, it is hoped that cleaner and more proper business will be conducted by SME. Ethnic group also influence in understanding of SME in COC.

b. Limitation

Limitation of the study includes of the cities chosen Bali and Makasar in the central of Indonesia and concentrate to the SME export oriented. The expanding the sample and cities will improve the validity of the research.


  • Cample and Stanley, Experimental Design and Quasi Experimental Design.
  • Deloitte and Touche. 1999. Fraud in Africa Survey, Deloitte and Touche Forensic, Johannesburg.
  • Fisher C M, Shirole R & Bhupatkar A P (2001) Ethical stances in Indian Management Culture. Personnel Review; 2001; 30, 5/6
  • Francis T. Hannafey, Entrepreneurship and Ethics: A Literature Review
  • Indonesia Business Link, Code of Conduct for SME 2011, Indonesia
  • International Organization of Employers, SMEs and The Crisis: Implications for Employers’ Organizations, August 2009.
  • Manjit Monga (2005) Value orientations: a case study of north Indian manufacturing managers . The Journal of Management Development; 2005; 24, 7/8
  • Robinson H and van der Mescht, Ethics beyond the code of conduct – understanding the ethical dilemmas of entrepreneurs Brisbane Graduate School of Business Education, Rhodes University, Queensland University of Technology, J Lancaster, Department of Accounting Rhodes University
  • Rossouw, G.J. 2002. Business Ethics in Africa, Oxford University Press, Cape Town.
  • Vasanthi Srinivasan and Diana Joseph. The Business Ethics Program: Responsible Business Practices in SME in India: An Overview.

Presented in International Conference on Management, Economics and Finance (ICMEF 2012) Proceeding. 15th-16th October 2012. Hilton Hotel, Kuching, Sarawak, Malaysia. Published by

Maria NainggolanMaria Nainggolan
PPM-Manajemen, Jakarta, Indonesia

Yanto Sidik PratiknyoYanto Sidik Pratiknyo, International CEFE Association for Entrepreneurship, Frankfurt Germany
PPM-Manajemen, Jakarta, Indonesia

Henky Satrio & Riana Sinaga, Indonesia Business Link, Jakarta, Indonesia

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