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 Table of contents

1. Indonesian corporate governance................................................................................................................ 1

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Document 1 of 1

Indonesian corporate governance

Author: Muljadi, Kartini

Publication info: Corporate Finance, suppl. A Guide to Corporate Governance (Sep 2002): 20-21.
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Abstract: Certainly the effect of the recent financial scandals and corporate collapses has been felt here and no
doubt there are lessons to be learned from them. However, in Indonesia, corporate governance reform has
been on the agenda for some time. The crippling impact on Indonesia's economy of the Asian financial crisis
brought with it recognition of the need for improved standards of governance. Establishing a more robust culture
of governance has been identified as one of the keys to restoring investor confidence. Concrete steps have
been taken. Perhaps the most visible was the establishment by the Indonesian government, in August 1999, of
a national committee for corporate governance. The committee's mandate was and is to advise the government
on the development and implementation of a national corporate governance policy. In March 2001, the
committee published a national code for corporate governance.

Full text: INTRODUCTION The recent financial scandals and corporate collapses which have beset US financial
markets have not gone unnoticed in Indonesia: Certainly their effect has been felt here and no doubt there are
lessons to be learned from them. However, while it may be these much publicised events that have lead to
sudden calls for more stringent regulation in the US and elsewhere, in Indonesia, corporate governance reform
has been on the agenda for some time. The crippling impact on Indonesia's economy of the Asian financial
crisis brought with it recognition of the need for improved standards of governance, both in the private sector
and the public sector. Establishing a more robust culture of governance, within companies and government
agencies, has been identified as one of the keys to restoring investor confidence. Concrete steps have been
taken. Perhaps the most visible was the establishment by the Indonesian government, in August 1999, of a
national committee for corporate governance. The committee's mandate was and is to advise the government
on the development and implementation of a national corporate governance policy. In March 2001, following a
period of extensive research and public consultation, the committee published a national code for corporate
governance (the code). LAW The code was not published in a vacuum. There already existed in Indonesia a
serviceable body of law on corporate governance, at least in the private sector. In 2001, an Asian Development
Bank appointed research team reviewed Indonesia's corporate governance regime and concluded that, while
reform was warranted in certain areas, generally speaking, Indonesia had a sound base of law. So far as the
private sector is concerned, the chief sources of law pertaining to corporate governance are the company law
(law No. 1 of 1995) and, for listed companies, the listing rules (stock listing regulation No. I-A, decision of the
board of executive directors of the Jakarta stock exchange No. Kep315/BEI/06-2000). Detailed analysis of the
relevant requirements of the company law and the listing rules is beyond the scope of this article but notable
features include the following: Company law * A company's board of directors is fully responsible for
management of the company. Each member of the board is required to discharge their duties in good faith and
in the interests of the company, and is personally responsible for any default or neglect in the performance of
their duties. * A member of the board of directors is not entitled to represent the company if they have an
interest conflicting with the interests of the company. * Within five months following the close of each financial
year, the board of directors is required to prepare and submit to the company's shareholders an annual report.
The annual report must include, among other things, annual accounts with explanatory notes and a report on
the operations and results of the company during the financial year in question. Each member of the board of
directors and the board of commissioners is required to sign the annual report before it is submitted to the
shareholders, and if any member of the board of directors or the board of commissioners fails to do so, the

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reasons for this must be provided in writing to the shareholders. In the case of public (listed) companies which
issue debt instruments and companies whose business involves mobilisation of public funds, the annual
accounts must be audited by a public accountant. * The company law contains various provisions designed to
protect the interests of minority shareholders. Listing Rules * Listed companies are subject to continuous
disclosure requirements. * Listed companies are prohibited from engaging in certain types of transaction. There
are specific requirements applicable to material transactions, and transactions deemed under the listing rules to
involve a conflict of interest. These include the need for independent appraisal of the transaction by a suitably
qualified expert. * At least 30% of a listed company's board of commissioners should be independent
commissioners who have no affiliation with controlling shareholders, and who are elected by non-controlling
shareholders. * Listed companies must have an audit committee. The audit committee must have at least three
members and must be chaired by an independent commissioner. The other members of the audit committee
must be independent parties appointed from outside the company, and at least one of them must have
accounting and financial expertise. The management of state owned (Persero) companies is regulated by a
decree of the minister for state owned enterprises (decree No. Kep-23/M-PM.PBUMN/2000 issued in May 2000)
This provides that state owned companies are to be managed in accordance with principles of good corporate
governance and so as to promote transparency, independence and accountability. The decree specifically
requires that state owned companies establish an independent audit committee. CODE The code sets forth a
number of principles to observed in the conduct of a company's affairs. Their underlying purpose is expressed
to be: 1. to enhance transparency, accountability, reliability, responsibility and fairness, in order to strengthen
the company's competitive position and create a sound environment for investment. 2. to encourage
professional, transparent and efficient management of the company; to enhance the independence of the
company's commissioners, directors and shareholders; to encourage shareholders, commissioners and
directors to make decisions and act with a strict sense of morality, in compliance with the law and in accordance
with their social responsibility towards the various stakeholders in the company and the environment. The code
addresses issues such as shareholders' rights and responsibilities, the composition and functions of the board
of directors and the board of commissioners, internal and external audit, disclosure and insider information. It
also focuses on confidentiality, business ethics, donations, compliance with health, safety and environmental
requirements and equal employment opportunity. Among the guidelines contained in the code are the following.
* Equal treatment of shareholders: All shareholders should be treated equally and be provided with full and
accurate information to enable their participation in decision making at shareholders' meetings. Controlling
shareholders should be mindful of their responsibilities as shareholders in exercising influence over corporate
management. * Stakeholders: The code recognises the interests of stakeholders other than a company's
shareholders. Stakeholders are described as including the company's customers, suppliers and creditors, and
the surrounding community . The code provides that the rights of all stakeholders should be respected and,
more particularly, that all stakeholders should be provided by the company with information necessary to
protect, and afforded a means of redress for infringement of, their rights. * Directors and commissioners: Each
member of the board of directors and the board of commissioners should be of good character and have
relevant experience. They should each be composed in such a way as to allow effective, appropriate and swift
decision making, so that its members have no interests which might impair their ability to perform their duties
independently and critically. They should meet regularly and, in principle, at least once a month, and should
prepare accurate minutes of all meetings. Depending on the specific character of the company, at least 20% of
the members of the board of directors should be external directors independent of the board of commissioners
and controlling shareholders. The views of minority shareholders should be considered in the process of their
nomination and appointment. Members of the board of directors and the board of commissioners should derive
no personal gain from the company's activities other than their remuneration in that capacity. * Audit: The board
of commissioners should establish an independent audit committee. External auditors should be appointed by

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the shareholders from candidates nominated by the audit committee. * Business ethics: The code specifically
provides that directors, commissioners and employees of a company should never attempt to influence
decisions by offering financial inducements to government officials. It also states that it is inappropriate for
company funds or assets to be used to make political donations. The code is intended to apply to all Indonesian
companies, including state owned companies. While it does not have the force of law, its stated objective is to
'become the reference point as a model of good corporate governance for the Indonesian business community'.
Proposed revisions to the company law are currently before parliament. It is expected that these revisions will
see a number of the principles and guidelines set out in the code adopted as law. OTHER DEVELOPMENTS *
Socialisation: The publication of the code was followed by a 'socialisation' program which included a series of
seminars and workshops designed to promote public awareness of the code, and the significance of good
corporate governance generally. * Institute of Commissioners and Directors: In July 2001, the national
committee for corporate governance established the Indonesian Institute of Commissioners and Directors. The
institute's objectives are to improve corporate governance practices and promote public awareness of corporate
governance issues. Its activities will include continuing education and professional development programs and
accreditation of directors and commissioners. * Sector codes: The committee is now engaged in the formulation
of a series of codes of conduct for specific sectors of industry. In each case, the codes of conduct will be
prepared in consultation with relevant industry representatives. A code of conduct for the oil and gas sector has
been drafted and is close to being finalised. This code of conduct will supplement the national code for
corporate governance and will address, among other things, occupational health and safety, industrial relations
and environmental issues. Other business sectors for which specific codes of conduct are planned include the
banking sector and the food production and processing industry. While going to print, Indonesia's Capital
Markets Supervisory Agency (Bapepam) has announced that it is preparing new regulations for accounting
firms in the light of the recent events in the US. AuthorAffiliation Kartini Muljadi SH, Kartini Muljadi &Rekan
AuthorAffiliation KARTINI MULJADI &REKAN AuthorAffiliation Bina Mulia I, 5th &6th Floors, Jalan H.R. Rasuna
Said Kav. 10, Jakarta 12950 Indonesia Phone: +(6221) 525 6968 Fax: +(6221) 525 5561 Email:
kmrlegal@indosat.net.id AuthorAffiliation Kartini Muljadi &Rekan has long been one of Indonesia's most highly
respected commercial law firms, We pride ourselves on a strong tradition of excellence in the delivery of legal
services to clients from around the World. We act for leading international participants in a wide variety of
industry sectors (banking and financial services, pharmaceuticals. consumer products, petrochemicals.
agribusiness, manufacturing, hotels and property development among others) and are regularly asked to advise
Indonesian and foreign government representatives and multinational agencies. The firm is active in initiatives
to promote good corporate governance in Indonesia with Senior Partner Kartini Muljadi a member of the
National Committee for Corporate Governance, Practice areas: Arbitration, Banking and Finance, Capital
Markets, Corporate and Commercial, Energy, Environmental Foreign Investment, Intellectual Property and IT,
Manufacturing and Distribution, Mergers and Acquisitions, Projects and Project Finance, Property and
Construction, Restructuring and Insolvency Languages spoken: Indonesian, English, Dutch

Subject: Corporate governance; Committees; Economic policy; Boards of directors; Commercial law

Location: Indonesia

Classification: 2110: Boards of directors; 9179: Asia & the Pacific; 1120: Economic policy & planning; 4320:
Legislation

Publication title: Corporate Finance

Supplement: A Guide to Corporate Governance

Pages: 20-21

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Publication year: 2002

Publication date: Sep 2002

Year: 2002

Publisher: Euromoney Trading Limited

Place of publication: London

Country of publication: United Kingdom

Publication subject: Business And Economics--Banking And Finance

ISSN: 09582053

Source type: Trade Journals

Language of publication: English

Document type: Feature

ProQuest document ID: 210156571

Document URL: http://search.proquest.com/docview/210156571?accountid=31533

Copyright: Copyright Euromoney Institutional Investor PLC Sep 2002

Last updated: 2010-06-08

Database: ABI/INFORM Complete

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