How to improve Indonesian corporate governance

Author: Ashley Lee | Published: 4 Oct 2012
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Allegations against PT Bumi Resources, Indonesia’s largest coal company, revealed a backslide in national corporate governance standards.

London-listed holding company Bumi PLC is investigating affiliate PT Bumi Resources for financial and other irregularities, highlighting lax corporate governance as an increasingly important issue.

Sources said that these developments were unsurprising in the natural resources sector, and stressed the importance of risk assessment in the popular jurisdiction.

For long-term Indonesia watchers, PT Bumi Resources’ current corporate governance issues were not much of a surprise, said a Jakarta-based lawyer.

Bumi PLC, a London-listed holding company, was created after financier Nathaniel Rothschild utilised shell company Vallar to purchase stakes in PT Berau Coal Energy and PT Bumi Resources in November 2010. These assets were subsequently listed on the LSX as Bumi PLC.

Aside from Rothschild, major shareholders include the powerful Bakrie Group, controlled by family members including Aburizal Bakrie, chairman of Indonesia’s Golkar Party and favourite for Indonesia’s 2014 presidential election. Many media outlets have reported tension between Rothschild and the Bakrie group.

Christopher Leahy, founder of risk advisory firm Blackpeak and editor-at-large for the Asian Corporate Governance Association, told IFLR that he is not surprised by some of the issues surrounding PT Bumi Resources.

Others agreed. One counsel noted that the Capital Market and Financial Services Supervisory Agency (Bapepam-LK) looked into some of PT Bumi Resources’ biggest groups before, and concerns arose in 2008/09.

But it is difficult for Indonesia’s regulators to begin enforcement actions. Leahy said that Bapepam-LK was well-intentioned but hamstrung by a hopelessly low budget, which meant that enforcement in the securities market thus far had been basically non-existent. He added that he hoped the implementation of the OJK as a super-regulator may help monitor markets effectively.

However another source warned that while Indonesia’s regulators are generally well-run, they have lacked firepower in enforcement – particularly with powerful groups like the Bakries. The OJK must improve enforcement rather than just add an additional layer of regulation, he said.

Generational changes required

Ultimately long-term changes are necessary to see corporate governance developments in Indonesia.

Indonesia’s corporate governance score in the recent CG Watch 2012 survey, undertaken by CLSA Asia-Pacific Markets and the Asian Corporate Governance Association, was the lowest of the countries surveyed, and the report said that reforms have stalled.

But that hasn’t deterred foreign investors. Leahy said, "Given the amount of FDI coming into Indonesia, there’s almost a sense of entitlement and complacency because money is coming in anyway."

Rather than a quick change mandated by investors and regulators, Leahy said that this is a generational issue. Indonesia’s well-established democracy means that the people’s will is important, and as they become fed up with corruption, corporate governance standards will improve.

For more on Indonesian foreign investment, sign up to IFLR’s IndonesiaForum 2012 here:

See also

'Is MIST the new BRIC?’

'The corporate governance issues changing Asian governance funds’

'The Indonesian M&A structuring quirks to watch out for’