a. FCGI Proposal for the Independence of Commissioners
FCGI proposed that there should be a clear definition regarding "outside" or "independent" member of the BoC. The FCGI proposed to use internationally accepted definitions of "outside" or "independent" that could be used in the Code of Conduct. The criteria of the Independent Commissioners were taken by the FCGI from the criteria of the Australian stock exchange authority on the Outside Directors. The criteria for Outside Directors in that one tier system were translated into criteria for Independent Commissioners in the position paper of FCGI. Hence the paper notices the example of the criteria of Independent Commissioner respectively:
- The Commissioner is not a member of management;
- The Commissioner is not substantial shareholder of the company or an officer of or otherwise associated directly or indirectly with substantial shareholders of the company;
- The Commissioner has not within the last three years been employed in an executive capacity by the company/another group member or been a commissioner after ceasing to hold any such employment;
- The Commissioner is not a principal of a professional adviser to the company or another group member;
- The Commissioner is not a significant supplier or customer of the company or another group member or an officer of or otherwise associated directly or indirectly with a significant supplier or customer;
- The Commissioner has no significant contractual relationship with the company or another group member other than as a commissioners of the company;
- The Commissioner is free from any interest and any business or other relationship which could, or could reasonably be perceived to, materially interfere with the Commissioner's ability to act in the best interest of the company. (Forum for Corporate Governance in Indonesia, 2000: p. 6)
Independency in this matter does not show that the commissioner is not independent because all commissioner basically are independent. The term “independent” here is a concern to the independency of commissioner as the representative of independent shareholders (minority) and representation of investor interest.
b. Independence Principle Terminology
There are two forms of terminology of "Independence" according to Sawyer's Internal Auditing written by Lawrence B. Sawyer. First, Practitioner Independence focusing on the structural form, relates to the commitment of the organization towards functional capacities in the organization. Setting the supervising function on the higher level within the company's organ is very appropriate since there is a psychological obstacle if the lower level within the company's organ is having a supervising function to correct the policies of the higher position.
Second, Professional Independence is a form of mental behavior which is difficult to be controlled, as it is closely related to one's integrity. Applying the "fit and proper test " towards the candidates assigned to certain positions in the company is one of the efforts to determine professional independence. However, one's independence and integrity is more determined on what one does in fact rather than on what one performs in appearance. (The Indonesian Institute of Corporate Governance (IICG), 2000: p. 6)
In addition to conducting a fit and proper test, the creation of equal opportunity to everybody to apply for the position will lead to the selection of more qualified candidates.
C. Independent Commissioner Pursuant to Laws and Regulation
The term and existence of Independent Commissioners legally known after the issuing of Decree Jakarta Stock Exchange Decree Number Kep. 315/BEJ/06-2000 Circular Letter by Listed Stock regulation Number 339/BEJ/07-2001 dated 21 July 2001 .It remarks that listed companies are obliged to have Independent Commissioners proportionally equal to the shares owned by the non-controlling shareholders. In this rule the minimum requirement for the Independent Commissioners is 30 % of the BoC.
The company law has also accommodated the existence of Independent Commissioner. Article 120 stating that Deed of Establishment may govern 1 (one) or more Independent Commissioner and 1(one) Messenger Commissioner. Independent Commissioner appointed pursuant to general meeting shareholder resolution from not affiliated parties and major shareholder, other members of director and/or member of commissioner
Some criteria for the Independent Commissioners are as follows:
- The Independent Commissioner has no affiliation relationship with the controlling shareowner of the company;
- The Independent Commissioner has no affiliation relationship with the director and or other commissioners of the company;
- The Independent Commissioner has no double position as the director in other companies affiliated to the related company;
- The Independent Commissioner should understand capital market laws and regulations;
- The Independent Commissioner is proposed and appointed by the non-controlling shareholders (minority shareholders) through the General Meeting of Shareholders. This provision is then annulled with the Jakarta Stock Exchange Decree Number 339 dated 20 July 2001 stating that proposal and appointment of Independent Commissioner can also involving majority shareholders.
D. The Board of Commissioners and Committees
It is generally recognized that for the BoC to operate efficiently in a complex business environment, it must delegate some of its functions to board committees. Board committees provide a useful structure for performing detailed Board work by focusing on specific areas of the corporation's business or governance. Most commonly used committees are the executive compensation (or remuneration) committee, the nominating/governance committee, and the audit committee. Most internationally recognised guidance on the subject recommends that board committees be staffed wholly or primarily with independent members .
While board committees may not yet be commonplace in many parts of the world, they are likely to become more widespread as companies grow, become more complex, and face a broader range of issues. A board should consider adopting a commissioner and committee chair rotation policy to ensure that each commissioner has the opportunity to participate in a variety of ways and as a way of ensuring fresh viewpoints.
There are three Board Committees that have important roles in corporate governance:
a. Compensation/Remuneration Committee
Makes executive compensation decisions and determines compensation policies, including the relationship of corporate performance and the CEO's compensation.
b. Nominating Committee
Oversees the process by which commissioners are nominated, selects the candidates to be nominated, and recommends policies and procedures regarding board structure and process.
c. Audit Committee
Provides oversight of the company's accounting, financial reporting and disclosure practices, its system of internal controls, and its independent auditors.
