Indonesia

Author: | Published: 9 Oct 2003
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The implementation of good corporate governance in Indonesia is influenced both by culture and history. These aspects are an integral and inseparable element of the communities that make up the country and can be a significant barrier to particular government policies. The plurality and complexity of the society within the nation makes it difficult to create or adopt good management concepts. And this is true of corporate governance, which has been controlled by the Indonesian Limited Liabilities Company Law No 1 (1995) (Law No1/1995).

Law No1/1995 already contains the essence of good corporate governance on transparency, accountability, reliability, responsibility and fairness. However, some stakeholders demand that they still require specific measures to be ratified on the principles. As to the fiduciary duties of the directors of a company, there has been intensive discussion, with some experts of the opinion that the spirit of fiduciary duties is already included in Law No1/1995 and that there is no need to add or amend the articles, and others of the opposite opinion. What is clear is that discussion and demand will continue and that the rules on good corporate governance beyond the scope of Law No1/1995 will be sought.

The global business community needs to be aware that some of the big companies in Indonesia are based around family structures. The shareholders have family ties with the directors and/or commissioners or other key people in sister companies or affiliated companies. To avoid revealing ownership, special purpose vehicles are sometimes used to establish a company in a so-called tax haven so that no institution or government can infiltrate the confidentiality of the management of a company. Furthermore, the shareholders of the company, often unlisted, sometimes act as shadows to a company's executives supporting managerial decisions. This situation leads to a moral minefield for business people, adds to a company's risk and may decrease the value of the company.

The different cultural backgrounds of the Indonesian people cause a great variance of approach. This is especially true of those who live in the suburban areas of Kalimantan, Sulawesi, Papua and Maluku. Indeed, in the island of Java there still exist primitive communities. The language in Indonesia is Bahasa, but several areas still use tribal languages. Which law will prevail in each community can be uncertain.

The business community urgently needs the legal tools to make them feel secure and the government realizes this and has adopted the good corporate governance concept for this reason. However, the concept cannot yet be said to have been effectively implemented across the whole of the Republic of Indonesia.

A stronger legal framework and better law enforcement are necessary. The government's commitment to the principles is strongly indicated by the legislation in this area:

  • the Decree of the State Minister/Chairman of Capital Investment Coordinating Agency and Development of State Owned Enterprises No KEP-23/M-PM PBUMN/2000 regarding Practice Development of Good Corporate Governance in the State Owned Enterprises (Perusahaan Persero), May 31 2000; and
  • the Decree of the Minister of State Owned Enterprises No KEP-117/M-MBU/2002 Regarding The Implementation of Practice of Good Corporate Governance in the State Owned Enterprises (Badan Usaha Milik Negara - BUMN), August 1 2002.

The government is confident that the private sector will follow the same path as the Indonesian Capital Market Supervisory Board, the Jakarta Stock Exchange and public listed companies. Experience shows that several foreign investment companies have issued their own internal code of conduct as guidance to stakeholders.

Despite the government's efforts, the problems remain. A general overview of the current situation in Indonesia gives a clear picture of the problems that come when implementing good corporate governance principles.

THE APPEAL TO THE PRACTITIONER

Good corporate governance helps the officers of a company - directors, commissioners and shareholders - to make decisions, to take correct corporate actions and to manage the company or corporation in a good manner based on the prevailing laws and regulations.

Directors

Directors ensure that the company complies with the Articles of Association and prevailing laws and regulations. They are responsible with regards to their shareholders at the General Meeting of Shareholders of the company (GMS). The refusal of their report and obligation will make them personally liable. Accordingly, directors must perform their duties for the benefit of the company. Furthermore, directors must ensure that their company has conducted its social duties (such as providing a social fund for public facilities) and prioritized the stakeholders. Complying with the above, directors are strictly prohibited from conducting any transaction containing a conflict of interest or from taking any benefits beyond their salary and facilities. Therefore, in order to minimize any negative effects, the company's working programme and budget for up to five years should be previously determined by the shareholders at the GMS. The working plan and budget should contain the following:

  • a detailed working plan;
  • a target, business strategy, policy and working programme;
  • a detailed budget; and
  • a financial projection and other matters determined by the GMS.

Commissioners

The commissioners control and supervise the company as well as overseeing the performance of the directors and ensuring this is in line with the company's Articles of Association and the prevailing laws and regulations. They have responsibility for ensuring good corporate governance in practice. Furthermore, the commissioners are entitled to obtain any information with full access, comprehensively and punctually. Like directors, the commissioners must perform their duties for the benefit of the company. The commissioners vote and/or make decisions regarding the control and supervision of the directors and the relationship between the directors. Therefore, the commissioners must be neutral parties, with no interest in the company or its directors. (It should be noted that for a public company, the government is entitled to create and/or establish special committees, such as working committees, remuneration committees, insurance and business risk committees.) With respect to the relationship between commissioners, dissenting comment will be noted and recorded in the minutes of the meeting of the commissioners. This note and record is useful to increase accountability to shareholders. The commissioners are also strictly prohibited from conducting any transaction containing a conflict of interest, and taking anything but their salary and facilities from the company.

Shareholders

Shareholder must be protected through the mechanism of the GMS with respect to their rights granted by laws and regulations. In principle, the shareholders have the following rights:

  • to attend and vote at the GMS based on the one share, one vote principle;
  • to receive any material information regarding the company punctually and accurately. Furthermore, this information must be further explained during the GMS provided that it has been scheduled. Unscheduled information or explanation may be put in the miscellaneous session of the GMS or be postponed for the next GMS. Generally, under Indonesian company law and the company's Articles of Association, the unscheduled information will be explained in the Extraordinary General Meeting of the Shareholder (EGMS). In certain circumstances, the company may not disclose confidential information determined by the directors, even though the GMS is the highest body of the company. All information or explanations that need approval on simple majority consent will be noted and decided as a policy of the GMS (whether approved or not approved) to be used as guidance for the directors; and
  • to receive dividends and other benefits granted by the company. Under Indonesian company law and the company's Articles of Association, the payment of dividend should be annually explained and disbursed in the GMS.

Shareholders with the same share classifications should receive equal treatment. Generally, most Indonesian companies did not implement the share classifications provided by the laws, except for the state-owned companies.

It is important to note that, in common business practice nowadays, the shareholders have previously signed a shareholders' agreement, which regulates the rights and obligations between them. Sometimes, this agreement will cause a potential dispute and bring problems for the company. One such case was Manulife.

The discovery of any violation of laws by shareholders strengthens the position of directors because he or she is personally liable for any misconduct. In corporate cases, violation of the good corporate governance principles is common. However, Indonesian courts frequently do not act on these cases because (as mentioned earlier) there is poor understanding and information about the scope of the concept. The courts urgently need to increase their database and skills.

Although the law makes it possible to apply to the court, most of the cases remain undisclosed or are settled out of court. In practice there are many violations of every type and in every sector of business including banks and finance companies. Moreover, the exodus of foreign investors from Indonesia generally shows a lack of good corporate governance and uncertainty about the prevailing rules and regulations. The investors are aware that good corporate governance and legal certainty are vital.

Political instability and the preparations for a general election in 2004 mean that enforcement of the laws and regulations is weak at present. The political imbalance has caused legal and economic stagnancy and there has been little worthwhile improvement in most sectors. Business forecasts in Indonesia over the past two years do not indicate any significant progress and economists have doubts about the next two years.


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