Laws and regulations related to GCG implementation are be applied in line with GCG principles and is applicable based upon international best practices, therefore all stakeholders will benefit in carrying out the principles and provisions of standard of governance, corporate governance and corporate social responsibility.
The law which is described in the laws and regulation needs the role of the public institution as the front line of GCG implementation. In the framework of the national law, the public institution is the executor and regulator for legal enforcement to carry out the GCG principles consistently such as the Court, National Capital Market Supervisory Agency-Financial Institution, Bank Indonesia, Tax Office, Police Department and all other public institutions . These public institutions play an important role in providing legal protection. The effectiveness of the implementation of GCG by these public institutions will directly affect the compliance of GCG principle, which finally delivers a positive contribution to all stakeholders.
a. Indonesia’s Code for Good Corporate Governance
To promote and recommend national policies on good corporate governance as part of a voluntary movement for the private sector in Indonesia, the National Committee for Corporate Governance was founded through the Decree of the Coordinating Minister for Economy, Finance and Industry No. Kep–10/M.EKUIN/08/1999. The name of the committee has since been changed to the National Committee for Governance (Komite Nasional Kebijakan Governance/KNKG) to reflect its broader governance concerns such as for state-owned enterprises.
Since 1999, KNCKG which further became KNKG issued the first GCG guideline. The guideline has been several times revised among others in 2001. In addition, based on same reason, at the earlier 2004 KNKG issued GCG guideline for banking sector in Indonesia and GCG for insurance sector in 2006. Further, in the same year, KNKG issued GCG guideline for corporation. This guideline is issued to be a guideline for implementing GCG to all companies in Indonesia including companies operating based on Sharia principle.
- The guideline for implementation of GCG includes basic principle and basic guideline of GCG implementation which consistently in line with OECD principles, including[1]:
- maximizing corporate and shareholder value by enhancing transparency, accountability, reliability, responsibility, and fairness, in order to strengthen the company’s competitive position both domestically and internationally, and to create a sound environment to support investment;
- encouraging the management of the company to behave in a professional, transparent, and efficient manner, as well as optimizing and enhancing the independence of the Board of Commissioners, the Board of Directors, and the General Meeting of Shareholders; and
- encouraging shareholders and members of the Board to make decisions and to act with a strict sense of morality, in compliance with the prevailing regulations, having the force of law, and in accordance with their environmental and social responsibility towards the various stakeholders.
As this guideline comes into effect, all institutions whether public or private are urged to implement GCG consequently and effectively. The consistent implementation of GCG will finally deliver a positive impact to all stakeholders in Indonesia. This guideline is expected to be a guideline for the drafting of laws and regulation, therefore the GCG implementation will be supported by a strong and responsive regulatory framework.
b. GCG Principles in the Company Law
Prior to the enactment of Law Number 40 year 2007 concerning company law, which was previously regulated in law number 1 year 1995. This new law defines a limited liability company as a legal entity which constitutes capital alliance, is established on the basis of agreement, undertakes business activity by authorized capital divided into shares and fulfills the requirements stipulated in this law as well as its technical rules.
C. Company's Organ
General Meeting of Shareholders (“GMOS”)
The General Meeting of Shareholders represents the owner and has the highest authority in a company.[2] The GMOS has the power to:
- approve or reject fundamental transactions such as consolidation, merger, acquisition, bankrupcy, dissolution of the company;
- appoint and dismiss members of the Board of Commissioners and the Board of Directors; and
- access to all company information.
The Board of Commissioners (“BoC”)
- suspend directors and convene a GMOS to consider removal of directors;
- demand and receive information from the Board of Directors about its management of the company;
- enter the premises of the company and inspect its records;
- approve or assist in certain transactions as listed in the company’s articles of association; and
- together with the Board of Directors, sign the annual report for approval by the GMOS.
The BoC also has the duties to:
- provide opinions and suggestions to the GMOS regarding annual work plan and budget;
- keep up to date with the developments in the business of the company; and
- report immediately to the GMOS if the BoC notices a decline in the performance of the company.
The Board of Directors (“BoD”)
- represent the Company both in and outside the court of law;
- administer the company’s books of accounts;
- prepare and sign the company’s annual report for approval from GMOS; and
- establish and maintain a Register of Shareholders and Minutes of the GMOS.
Indonesia’s two tier board structure is similar to the two tier board structure used in Holland, Germany and France. Although theoretically a strong structure, the two tiered board has not lived up to expectations, particularly in Germany and France where it is under critical pressure for two reasons. First, the disinterestedness of the supervisory board can be compromised easily if each ‘independent’ board member is really a representative of interlocked shareholders and bankers, which is often the case. Second, it is easy for both boards to descend into party politics at regional or national level, or into the micro politics of the organisation and its personalities. There is then a tendency to exclude the other board, in which case both boards lose sight of working towards a common end.
[3]In Indonesian companies where family-based shareholders have held dominant positions, the BOC’s have generally been ineffective in safeguarding the interests of minority shareholders. The ownership of listed companies is highly concentrated and the percentage of Directors belonging to the controlling group is very high. Checks and balances, such as representation of third party interests through independent commissioners is lacking. Transparency could be strengthened via disclosure practices
D. Implementation of GCG Principle in the Laws and Regulations applicable to State Owned Enterprises (“SOEs”)
State Owned Enterprises (SOEs) in accordance to law number 19 year 2003 is a legal entity which all or major part of its capital is owned by the state through direct participation which comes from separated state’s property. SOEs based on this law consist of perusahaan perseroan and perusahaan umum.
The establishment of SoEs is aimed to contribute to the national development and increasing national revenue. Ironically, the mismanagement of SOEs plays a significant role towards both financial and monetary crisis. Based on this point, the government imposes regulations regarding SOEs especially related to GCG.
In relation to the reformation effort on the SOEs governance, Ministry of SEOs issued Decree Number Kep-117/M-MBU/2002 which obliges SOEs to use and obey special requirements from GCG principles. Other decree has also been issued by the SOEs Ministry especially in respect to Audit Committee. Long term planning arrangement, annual plan and budget and candidate assessment for members of board of director which completing decree Kep-117.
To support the implementation of GCG in the SOEs surrounding, some of technical regulations have been issued either by President and Ministry of SOEs namely:
1. Presidential Decree Number 122 Year 2001 regarding Privatization Policy team in State Owned Enterprises
This Presidential Decree is concerning the establishment of State Owned Enterprises Privatization Policy Team which responsible to set up policy relating to privatization issues and also to responsible for the smoothness of privatization process. This Presidential Decree also stated that one of the reasons to carry out SOE privatization is to increase SOE performance and create an added value to the company based on good corporate governance principle. This decree is also regulating about the organization of this team.
2. Decree of Minister of States Owned Enterprises No. Kep-103/Mbu/2002 Regarding Establishment of Audit Committee for State Owned Enterprises.
This Ministerial Decree is regulating the establishment of Audit Committee for SOE which have functioned to help Board of Commissioner, Audit Committee is independent and directly responsible to the Board of Commissioner. In order carry out his function, Audit Committee has several tasks such as evaluating the audit process and the result of the audit done by Internal Audit or External Audit after that Audit Committee directly report to the Board of Commissioner. This decree is also regulating about the organization of this committee as also the requirement to become member of this committee.
3. Decree of Minister of State Owned Enterprises Number Kep-104/Mbu/2002 Tahun 2002 regarding Assessment for Candidate of Board of Director of State Owned Enterprise
This Ministerial Decree is regulating the formal and material requirement to become SOE director candidates. And also the establishment of Evaluating Committee for evaluates SOE director candidates this decree also stated that each Board of Director candidates before they acknowledge as a Board of Director is obligatory to sign statement letter to carry out and build good corporate governance principle in company management.
4. Circular Letter of Minister of State Owned Enterprises Number Se-01/Mbu/2004 year 2004 regarding provision for Board of Director, commissioner and Board of Supervisory and employee of SoEs as well which become the member of political Party and/or candidate of law maker, DPD, provincial/Regency Law maker (Law Maker Candidate.
This Ministerial Letter is stated that pursuant to good corporate governance principle and to prevent misuse company facility which can damaged the company therefore Minister of SOE issued regulations about Board of Director, Board of Commissioner, Advisory Board and SOE employee who become member of political party and/or legislation candidates. So based on this letter none of the Board of Director, Board of Commissioner, Advisory Board and SOE employee can also holds as a member of political party and/or legislation candidates, they have to choose whether to stay as SOE family or will be discharge from SOE family.
E. Implementation of GCG in Laws and Regulations applicable to Public Listed Companies
The Indonesian Capital Market Supervisory Agency-Financial Institution, or “BAPEPAM-LK”, regulates publicly listed companies in the Jakarta Stock Exchange and Surabaya Stock Exchange. Capital Market Law Law No. 8/1995 defines a public company as one whose shares are held by at least 300 persons and has a paid-in capital of Rp. 3 billion.
The Capital Market Law aims to ensure that the capital market processes proceed in an orderly and fair manner, and that public investors are protected from harmful and illegal practices. BAPEPAM is authorized to administer and enforce the law, as well as to conduct investigations under the Indonesian Criminal Code.
In addition to the Capital Market Law, below are some other key regulations issued by BAPEPAM and the Jakarta Stock Exchange:
- Kep-45/PM/2004, Regulation No. IX.1.6 - regarding Directors and Commissioners of Public Companies. This regulation states the requirements that should be satisfied by candidates for members of the Boards;
- Kep-29/PM/2004, Regulation No. IX.1.5 - regarding the establishment and guidelines of the Audit Committee practices;
- Kep-63/PM/1996, Regulation No. IX.1.4 - regarding the establishment of a Corporate Secretary;
- Kep-38/PM/1996, Regulation No. VIII.G.2 – regarding the Annual Report.
- Kep-305/BEJ/07-2004, Regulation No. I-A - Listing of Equity Stocks and Securities Ownership Except Stocks Issued by the Company and Attachment II regarding Independent Commissioners, Audit Committees, and Corporate Secretaries.
There are many more regulations issued by BAPEPAM, such as regulations related to transparency, accountability of the Boards, decision-making process of the Boards, and public protection, which can be found in BAPEPAM’s website
www.bapepam-lk.go.id.F. Implementation of GCG Principles in the Laws and Regulation applicable for Banking.
Banking as an intermediary institution becomes an essential attention in Indonesian Economic development. The need to apply the principles of GCG is an important part of prudential banking principles in all banking transactions. Bank Indonesia as the banking institution regulator has issued many regulations which is directly related to the effort of GCG implementation. In 2006 Bank Indonesia issued Regulation Number 8/4/PBI/2006 dated 30 January 2006 on the implementation of GCG by Commercial Banks and further amended with regulation number 8/14/2006 regarding the Implementation of GCG Implementation by Commercial Banks.
To ensure the implementation of the GCG regulation, Bank Indonesia has also issued a circular letter Number 9/12/DPNP to all commercial banks to apply GCG. This circular letter concerns among others on the formality and requirements for the candidates of board of directors and commissioners of the bank.; the formulation of an Audit Committee; formulation of a risk supervisory committee, renumeration committee, and nomination committee.
The circular letter mandates that all banks should report their GCG implementation in the respective banks. The report can be integrated in the banks annual report or as a separate report from the annual report.
Other regulation which are related to the effort of GCG implementation in the banking sector are regulations related to risk management. The regulation are as follow:
- Bank Indonesia Regulation Number 5/8/PBI/2003 concerning the implementation of Risk Management for Commercial Banks
- Circular Letter Number 8/9/Pbi/2006 regarding the Implementation of Risk management for Commercial Banks
- Bank Indonesia Regulation Number 8/9/Pbi/2006 regarding amendment of Bank Indonesia Regulation number 7/25/Pbi/2005 on the certification of Risk Management for the Members and Official of Commercial Banks
- Bank Indonesia Regulation Number 9/15/Pbi/2007 Regarding the implementation of Risk Management in the Use of Information Technology by Commercial Banks.
The implementation of risk management is expectedly to increase shareholder values; and providing a clear description to the bank management in respect to the possibility of bank losses in the future; increase both methods and process of systematic decision making which is based on the complete information. Risk management can also be used as accurate measurement basis in respect to banking performance.
[1] National Committee on Governance, Code for Corporate Governance, Ref 4.0, preamble.
[2] Company Law, Article 1.3 and 63.
[3] Garratt, Bob, The Fish Rots from the Head; The Crisis in our Boardrooms: Developing the crucial skills of the Competent Director. Longond: HarperCollingsBusinesscompetent director, 1996.
