Asian Roundtable on Corporate Governance: Ten Years from Now

Asian Roundtable on Corporate Governance is established in 1999, serves as a regional forum for exchanging experiences and advancing the reform agenda on corporate governance while promoting awareness and use of the OECD Principles of Corporate Governance. The Asian Roundtable on Corporate Governance (ARCG) gathers the most prominent, active and influential policy makers, practitioners and experts on corporate governance in the region, from OECD countries and relevant international institutions.

The goal of ARCG is to support decision makers in their efforts to improve corporate governance in the region. This is achieved through informal peer review of corporate governance policy frameworks and practices in the region, benefitting from international experiences. Participants seek to raise awareness of major developments and challenges, evaluate implementation and enforcement as well as discuss and analyze policy options to support viable and effective corporate governance.

Forum for Corporate Governance in Indonesia (FCGI) along with Indonesian Institute for Corporate Directorship and Indonesian Capital Market Supervisory Board (Bapepam) attended the prestigious meeting of ARCG in Manila 9-10 September 2009. In commemorating ten years ARCG since it’s established in 1999, the conference took “Asian Roundtable of Corporate Governance: Ten Years from Now” as the meeting topic. The meeting was expectedly became the major turning point for good corporate governance implementation in the next decade. The meeting was a milestone with three key features: First, the meeting is designed to review and evaluate implementation of corporate governance standards and practices as a vital step to reinforcing market integrity. Second, the meeting will launch Guideline on Fighting Abusive related Party Transaction in Asia, an issue that has been much debated. Asian decision-makers collectively developed this Guide through a Task Force formed in 2008. In this meeting, the participants will also discuss on how to implement the guide. Third, the conference also spent some time to reflect on what next decade of corporate governance in Asia may look like, new priorities, obstacles and how OECD can help.

As the conference aimed to review and evaluate implementation of corporate governance within 10 years, there are some significant achievements that have had by ARCG and OECD namely:

a. Broad range of corporate governance reforms in many economics;
b. Globally compatible rules and regulations are introduces such as enhancing transparency and accountability;
c. Most of emerging market economies adopted outside director and audit committee as part of mandatory requirement.
d. Convergence of corporate governance regulations in Asian Economics
e. Improvement quality of corporate governance around Asian Countries.

There also significant role that has been played by ARCG within 10 years to the implementation of Corporate Governance is Asia countries namely:

a. Provide podium to share and exchange experiences and ideas on corporate governance implementations
b. Set current critical agenda for the region
c. Build positive influence across economies through supports as well as through pre assure
d. Share director training knowledge and experiences
e. Build connected cooperation among business, academics and regulators, etc.

In this meeting, OECD launched new corporate governance series of guideline on fighting abusive related party transactions in Asia. This guideline is developed by the Task Force, seeks to provide policy makers, enforcement authorities, private institutions, shareholders and other stakeholders with key recommendations and analysis of core issues. The Guide focusing on publicly listed companies in Asia which may also be useful to technical assistance agencies working on this issue. The recommendations covering legal definition and framework of related party transactions, highlight on several experiences in some countries in Asia regarding related party transactions, board oversight and approval as well as some case studies on how to assess Related Party Transactions.

The last key feature of the conference is to reflect on what next decade of corporate governance in Asia may look like, new priorities, obstacles and how OECD can help. The participants were divided into some groups discussing about what the possibility issues and actions can be taken in the next decade. The result mostly concern on implementation of the OECD standards and guidelines as well as enforcement on the laws and regulations containing corporate governance principles.

Even some achievements have been reached and significant role has been played, some huge homework on implementations and practices of good corporate governance within Asian countries still be a greatest barrier for the next decade. There are still large disparity between practices and regulations. These may happen because of the weakness of enforcement and inactive stakeholders. Therefore, it needs continued effort to strengthen the enforcement capabilities of regulators and involving all stakeholders to support the implementation.

The Role and responsibilities of the board is also reviewed as their value of role and responsibilities needs to be increased. The effectiveness of a board in directing and controlling a company to ensure that all actions are in the interest of shareholders has again been the subject of scrutiny. In particular, their failure on the ability to provide effective stewardship and to ensure risk management is allegedly related to the current global financial crisis.

To empowering shareholders with the ability and willingness to take governance factors into account when making their investment decisions and to actively participate at general meetings and make their voices heard is key to keeping management and board vigilant and ensuring that they act in the interest of shareholder. This also being the focus of the corporate governance in the next decade.

In the last session of the meeting, Mr. John Lim, the Chair of Asia State Owned presented an updated on the Roundtable Meeting of Asia State Owned Enterprises. The last Asian Roundtable on SOEs was held in Bangkok 20-21 May 2009. The SOEs Roundtable has developed guideline of corporate governance in SOEs and developed some important comparative publications on key issues such as “Enforcement of Corporate Governance in Asia: Unfinished Agenda” and also “Asia: Overview of Corporate Governance Frameworks in 2007”.

One-two Tier System of Governance

Author: Jože Bajuk
joze.bajuk@socius.si
http://www.socius.si/si/knjiznica/

The key novelty of the amendment to the Companies Act is its introduction of the opportunity to choose between the two-tier and one-tier systems for governing domestic public limited companies. This is indeed a true novelty since the existing legislation does not allow this choice. The key novelty brought by the amendment to the Companies Act[1] is clearly the introduction of the opportunity to choose between the two-tier and one-tier systems of governing domestic public limited companies. This is indeed a true novelty since the existing legislation does not allow such a choice, although in limited cases the law allows governance of public limited companies without supervisory boards, which should not be understood as the one-tier governance system known in _domestic_ Anglo-Saxon legal systems.

The System of Governing Public Limited Companies

In both theory and practice, two opposite governance systems have been created, the Anglo-Saxon one-tier[2] and the continental European two-tier[3] systems. Between these two, other governance systems may be classified, in fact taking individual solutions from both and therefore occupying the space between them.
There are three bodies for governing public limited companies in the two-tier system. Namely, the general meeting of shareholders, the supervisory board and the management board. Their competencies are relatively clearly delimited by the law itself. The general meeting of shareholders is primarily competent to adopt changes to the status of the company, profit-sharing and the appointment/dismissal of supervisory board members.

The supervisory board primarily supervises the operation of the management board, appoints/dismisses the management board, takes care
of the motivation of the management board and adopts annual reports. The management board conducts the company's business operations. The law also strictly restricts the option to transfer the authorities of one body to another body. Examples of such a transfer are the transfer of decision-making on the annual report from the supervisory board to the general meeting of shareholders, the restriction and tying of the adoption of the management board_s business decisions to the approval of the supervisory board etc.

The one-tier system knows two bodies of governance. They are the general meeting of shareholders and the board of directors. In its composition and competencies, the general meeting of shareholders does not differ considerably from the general meeting seen in the two-tier system. Thus, the general meeting also has the authority to appoint the company's directors. There are bigger differences in the board of directors. Its members are directors who the law itself divides into non-executive and executive types.

Theoretically, the competence of managing the company is held by the board of directors as the body of governance, however, it transfers this competence to the executive directors and for itself retains the competence of supervising their work. Here, I have to stress again that the board of directors consists of both executive and non-executive directors. A company may also have executive directors who are not members of the board of directors. It is possible to say that such companies have two types of executive directors who have different competencies, tasks and
responsibilities. Otherwise, the role of the executive directors strongly resembles the roles of management board members in the two-tier system of governance since the executive directors conduct the company's business operations.

Strengths and Weaknesses of Governance Systems
There is no universal answer to the question of which governance system is better. The reason is that corporate governance in the sense of arranging the relations between the shareholders and the boards should not be understood as merely a legal category. We must be aware that different models of governance have been formed in different economic and social systems. The one-tier system has thus been created in the Anglo-Saxon space, characterised by dispersed share structures, an active capital/securities market and, last but not least, a majority voting system[4] where the winner has very concentrated decision-making power etc. A pure two-tier system has developed in the Germanic environment characterized by majority shareholders of companies, powerful participation of the participants (employee participation), a less liquid capital market, a proportionate voting system[5] etc. The question of a better/poorer system has in fact only appeared in recent years when we started to witness serous globalisation trends in the economy. It started with the linking up of companies - multinational entities and continues with the strong tendency of shareholders to follow advanced standards of corporate governance[6]. A logical consequence of these trends and requirements is the search for the most efficient governance system which would
reduce the risk for shareholders, take their interests into account and, finally, enable the optimal level of influence by the relevant participants on the operation of capital companies.

Our advice to shareholders when choosing between one-tier and two-tier systems in the future is as follows. The practice of managing and governing companies has shown through the years that the one-tier system is probably more efficient in cases where the company has a majority or prevailing shareholder. Here, the joining together of the managerial and supervisory bodies may represent a certain advantage as there is no real conflict of interest between the shareholder and the management board. The goals and purposes of such companies are largely defined by the majority shareholder, be it a natural person or a company. The joining of the two bodies thus brings about the more efficient and faster adoption of important decisions.

There is a somewhat different situation in the relations between interests in companies with a dispersed share structure. In these companies the shareholders are unable to articulate the goals of the company as their interests differ and their only common denominator is the expectation of a yield in the forms of dividends and growth in the market price of the shares. In these cases an important role may be played by the supervisory board which is separated from the management board, with its task being, besides implementing, supervising and motivating the management board, to establish the goals and purpose of the company _on behalf of the shareholders_ or at least to constantly search for the common interest of capital owners - shareholders. Because of these positive effects, supervision by the separated body is better in quality and more transparent in these cases, which is in the key interest of the shareholders. As mentioned above, here the separation of the supervision and management bodies may produce certain advantages.

[1] Prepared by an expert team at the Ministry of the Economy.
[2] The case of the British legislation.
[3] The case of the German legislation.
[4]The latter should, of course, be understood as just an example of understanding the general view of society regarding the distribution of powers in the social environments concerned.
[6] This is proven by the many national and transnational codes of corporate governance that have been adopted.

The 4th Network on Corporate Governance of State Owned Enterprises

It was a prestigious opportunity for Forum for Corporate Governance in Indonesia (FCGI) to participate as Indonesian delegations in the international forum of 4th Asian Network on Corporate Governance of State-Owned Enterprises (SOEs) held in Bangkok 20-21 May 2009 (“Network”). The Network is annually held by Organization of Economic and Co-operation Development (OECD). An international organization established to help governments in tackling economic, social and governance of globalised economy.

The Network gathered around 50 participants, including the most prominent, active and influential policy makers, practitioners and experts regarding corporate governance of SOEs in the region. They constitute a peer of group that can press for legal, regulatory or other type of reform in this field. The Network aims to raise awareness, evaluate the currents policies of Corporate Governance, and support viable and effective reform on the importance and challenges related to the implementation of good corporate governance of SOEs in Asia countries.

To keep the dialogue focused and produces a tangible outcome, the Network has progressively developed a Regional Policy Brief, providing a set of recommendations and priorities for policy reform in order to improve the corporate governance of SOEs in the economic of Asia. The Network has also developed complete guidelines on the implementation of good corporate governance in SOEs notably in Asia. The guidelines are the first international benchmark in corporate governance of SOEs area. The use of the guidelines aims to raise awareness and promote implementation of good corporate governance in this sector.

As both policy brief and guidelines on the implementation of good corporate governments has progressively made, this 4th network focused on the implementation issues, discussing examples of international best practices, and how to implement the recommendations as provided by the policy brief and guidelines. It was also discussed about monitoring mechanism to follow-up implementation of the Policy Brief in the years to come in Asian countries.

During the Network session over the relevancy of the guideline on corporate governance of SOEs in Asia, all delegation has basically agreed with the guidelines and it has been widely accepted by Asian countries. Even some comments arisen, but generally speaking, the problem of guidelines contents are solely technical problem since the countries has different background, culture and system. Even the content of the guidelines has been accepted, In fact, some Asian countries found difficulties to straightly implement the guideline.

From the discussion within the session, the participants identified some common challenges faced in the implementation of corporate governance in SOEs. The major challenge is the state position as an owner of SOEs, somehow, considerably to much involve in the day-to-day management of SOEs. An excessive right of state as an owner causing some serious problem on the focus of corporate governance implementation in SOEs. This causing some dependency in decision making, bureaucracy problem, and lead to the less professional and undefined objectives.

The problem of director selection and nomination process also emerged. Some countries has problem with mechanism and process of getting the right people for this top job. Political interest in certain countries becoming an immense cause for this. Some government still inevitably appoints the SOE directors on their political future prospect as SOEs are a huge hope for political funding within the political process. In certain countries it worsened with the active participation of parliament in deciding the directors of SOEs either formally through the nomination and selection in the parliament so called fit and proper test or politically influence (intimidate-red) the government to choose on political interest-based, in this regard the president or related ministry who has the final right decision to appoint the directors. Other than state ownership and nomination of board directors, the challenges of ensuring implementation of corporate governance guidelines are regulatory reform, equal treatment to all shareholders, stakeholder interest as well as transparency and disclosure.

Some developments in some countries are also shared within the network session. Some countries like Thailand, Taiwan, Philippine, China, Indonesia and Bhutan shared their impressive development in this field i.e. Thailand has successfully develop principle guideline for their country to implement corporate governance in SOEs. Their focus on corporate governance in SOEs managed by State Enterprises Policy Office, structurally established under Minister of Finance. In the future they will make separation between policy, regulatory and operational responsibilities.

Philippine has developed a score card as an evaluation for SOEs performance on corporate governance implementation. They have also established some kind of independent steering committee in the selection and nomination of SOEs’ director. Even the final decision will be prerogatively made by the president but the steering committee will play an important role to select the right man for the right job. This is will also minimize the collusion or nepotism practice within the nomination process. Some countries has successfully setting up centralize ownership entities i.e. the SASAC in china, SCIC in Vietnam and most recently the Druk Holdings in Bhutan. Indonesia is now on the way to develop this ambitious plan to centralized SOEs ownership by establishing SOEs holding company.

Indonesia has progressively adopted the guideline through regulatory reform until ministerial level. Indonesia has also developed regulations which strictly oblige SOEs to compliance with corporate governance. This aims to provide good system and best practices as well as internalized the penetration of good corporate governance culture in SOEs. In providing the guideline for corporate governance implementation Indonesia has made guideline on sectoral based such as good corporate governance for bank, insurance company and other corporation which also applied for SOEs.

Further, after all challenges and development have been shared and some intriguing discussion has been made within the network delegations, it can be concluded that some priorities should be managed to ensure the implementation issues running well. The priorities are in the areas of regulatory reform, ownership by the state, equitable treatment for all shareholders, transparency and disclosure, selection and nomination process for the board as well the responsibility of the boars. Last but not the least, a monitoring mechanism should be developed to ensure that the priorities well implemented

Audit Committee

A. Concept and Audit Committee Definition

One of the aforementioned committees, the audit committee, has separate tasks in term of supervising and assisting the BoC in fulfilling its oversight responsibilities. For instance, the Audit Committee has the power to conduct or authorize investigation into matters within the committee's scope of responsibilities. The Institute of Internal Auditors (IIA) recommends that every public company have an audit committee organized as a standing committee . The Institute also encourages the establishment of audit committees in other organizations including not for profit and governmental bodies. The audit committee should consist solely of outside commissioners, independent of management. The primary responsibilities of the audit committee should be assisting the BoC in carrying out their responsibilities as they relate to the organization's accounting policies, internal control and financial reporting practices. (The Institute of Internal Auditors, Internal Auditing and The Audit Committee: Working Together Toward Common Goals)

The existence of Audit Committee in the frame of Good Corporate Governance implementation can be seen from the regulations as follo :
1. Circular Letter of Bapepam Chairman No. Se-03/PM regarding Audit Committee
2. Decree of PT ursa Efek Jakarta Directors Number Kep-305/BEJ/07/-2004 regarding regulation No. I-A regarding stock listing and equity security otherthan stock issued by listed company applied since July 19, 2004.
3. Minister of SOEs Decree Number Kep-133/M-BUMN/1999 regarding formation of Audit Committee for SOEs
4. Professional Public Accountant Standard issued by Indonesian Accountant Association. Audit standard statement determined such requirements for auditor that certain problems in respect to the audit implementation is comunicated to supervisory in charge person in the financial report. The party mentioned herein as information receiver is audit committee.

In addition, Indonesian Audit Committee Association, an independent organization which has the same vision with GCG has issued an audit committee manual in which referred as a practical guideline to all audit committee members to understand its function, task and responsibility.

A. Function and Audit Committee Role

In general, audit committee exercises responsibility in three areas, namely:
a. Financial Reporting.
b. Corporate Governance.
c. Corporate Control.

1. Financial Reporting

The responsibility of the Audit Committee in the area of financial reporting is to provide assurance that financial disclosures made by management reasonably portray the company's:
a. Financial Condition.
b. Results of Operations.
c. Plans and Long Term commitments.

The specific steps involved in carrying out this responsibility include:
1. Recommending the independent accountants.
2. Overseeing the external audit coverage, including:
¨ Auditor engagement letter
¨ Estimated fees
¨ Timing of auditors' visits
¨ Coordination with internal audit
¨ Monitoring audit results
¨ Review of auditors performance.
3. Reviewing accounting policies and policy decisions.
4. Examining the financial statements, including:
¨ Interim financial statements
¨ Annual financial statements
¨ Auditor's opinion and Management Letters.
With respect to the review of accounting policies and policy decisions, a useful approach would be to require from the chief accounting officer a concise summary of all significant accounting policies underlying the financial statements. This summary should be updated as necessary and reviewed by both the independent accounting and the internal auditors.

2. Corporate Governance

The responsibility of the Audit Committee in the area of corporate governance is to provide assurance that the corporation is in reasonable compliance with pertaining laws and regulation, is conducting its affairs ethically, and is maintaining effective controls against employee conflict of interest and fraud.

The specific steps involved in carrying out this responsibility, include:
Reviewing corporate policies relating to compliance with laws and regulations, ethics, conflict of interest and the investigation of misconduct and fraud;
b. Reviewing current/pending litigation or regulatory proceedings bearing on corporate governance in which the corporation is a party;
c. Reviewing significant cases of employee conflict of interest, misconduct and fraud;
d. Requiring the internal auditor to report the scope of reviews of corporate governance and any significant finding.

3. Corporate Control

The responsibility of audit committees for corporate control includes an understanding of the company's key financial reporting, risks areas and system of internal control. The committee should monitor the control process through internal auditing, as the scope of the internal audit should encompass the examination and evaluation of the adequacy and effectiveness of the organization's system of internal control and the quality of performance in carrying out assigned responsibilities.

In addition, the new definition of internal auditing states that internal auditing is an independent objective assurance and consulting activity designed to add value and improve an organization's operations and it helps an organization accomplish its objectives by bringing a systematic, discipline approach to evaluate and improve the effectiveness of risk management, control and governance processes. (The Institute of Internal Auditors, Internal Auditing and The Audit Committee)
B. Membership

Moreover, further criteria and remarks concerning the audit committee are:
1. at least one audit committee member should have sound financial and accounting knowledge
2. chair of the audit committee should be present at Annual General Meeting to answer shareholder queries
3. the audit committee should invite such executives as it considers appropriate (and particularly the head of the finance function) to be present at the meetings of the committee but on occasions it may also meet without the presence of any executives of the company. Finance director and head of internal audit and, when required, a representative of the external auditor should be present as invitees for the meetings of the audit committee
4. the Company Secretary should act as the secretary to the committee
5. powers of the audit committee should include the following:
i. to investigate any activity within its terms of reference
ii. to seek information from any employee
iii. to obtain outside legal or other professional advice
iv. to secure attendance of outsiders with relevant experience, if it considers necessary
(Pratip Kar, 2000)



C. The Audit Committee Charter

The tone of a company's control environment is set at the top, by the board of commissioners in general and the audit committee in particular. The rest of the board often relies on the audit committee to notice and question any unusual business practice, aggressive accounting methods or violations of the company's code of business conduct. But at many companies audit committee members may not have the expertise in matters of internal control, and some people serving on audit committees have very little accounting or financial background at all. Accordingly, audit committee members need a reference guide to their responsibilities. That is the function of an audit committee charter.

A comprehensive charter enhances the effectiveness of the audit committee, serving as a road map for committee members. A well-thought-out charter also should describe the committee's composition and specify access to appropriate resources, for instance, the charter should authorize the audit committee:
a. Funding to retain outside legal counsel without approval from management;
b. Funding to retain an independent accounting firm if a second opinion is called for;
c. Ready access to all books, records and employees of the corporation;
d. Power to conduct any investigation appropriate to fulfilling its responsibility.
In addition, while auditors may find it difficult to detect fraud when management misrepresents the facts, they should take the control environment into account when planning audits - which means auditors should be looking at their clients' audit committee charter in order to set up the financial reporting that will be provided to the shareholders. (James W. Bean, 1999)

The responsibilities of the audit committee should be stated in a formal, written charter or equivalent document that is approved by the full board or governing body of the entity or institution. The charter should articulate the authority, responsibility and structure of the audit committee. The responsibilities, at a minimum, should address financial and other reporting practices, internal control and compliance with laws, regulations and ethics. The charter should also state that the audit committee will meet periodically and may call additional or special meetings as needed, if possible, the authority, responsibilities and structure of the audit committee should be provided in the governing law of the affected entity.

The audit committee charter should also clearly state that:
¨ The primary responsibility for financial and other reporting, internal controls and compliance with laws, regulations and ethics within the entity rests with executive management;
¨ The governing board or chief executive has oversight responsibilities in these areas, and the audit committee assists the governing board or chief executive in fulfilling these responsibilities. The audit committee must have unrestricted access to all information, including documents and personnel, and have adequate resource in order to fulfill its oversight responsibilities;
¨ It is important to have an impartial and objective assessment of the entity's management;
¨ The chief executive and the governing body must support and endorse an audit committee which operates independently of management and is free of organizational impairments;
¨ The audit committee and the internal auditors should maintain a degree of professional independence when assessing management's performance of its responsibilities. However, this does not mean that an adversarial role is necessary or desirable because the internal auditors and management should have common goals;
¨ To ensure the independence of the internal auditing function and that appropriate action is taken on audit findings, the Audit Committee should promote and enhance the mutual cooperation among the committee, internal auditors and executive management.
(The Institute of Internal Auditors, The Audit Committee in the Public Sector)

D. Audit Committee Structure
The Audit Committee should be made up of individuals who are independent of the day to day management of the entity and who have the necessary program and/or management expertise to perform their review function effectively. One of the primary reasons for this independence is to ensure an unbiased perspective on reports and recommendations brought to the committee. Independent individuals would be more apt to be impartial and objective in such matter.

The number of members on the Audit Committee should be determined by the size of the organization. Three to five members, however, is usually ideal. The audit committee will normally find it necessary to meet three to four times annually in order to fulfill its financial reporting responsibilities. (The Institute of Internal Auditors, Internal Auditing and The Audit Committee)

E. Conclusion

Good governance promotes relationship of accountability among the primary corporate organs (the BoC, the BoD, and the Shareholders) to enhance corporate performance. It holds management accountable to the BoC and the BoC accountable to shareholders. In this paradigm, the BoC is in place to ensure that management is working in the best interests of the corporation and its shareholders - by working to enhance corporate economic value. Furthermore, the BoC plays a critical role in directing corporate strategy and ensuring that managers are promoting corporate performance in furtherance of the corporate objectives. Essential to this role is independence of the commissioners meaning that the BoC:
· has the ability to discuss issues outside the presence of management
· is provided with sufficient information to take its decisions, and
· actively participates in agenda-setting and strategy.
This requires individuals with impeccable personal qualities, diverse backgrounds, core competencies and serious understanding of the company and the business.

Furthermore, the BoC in carrying out oversight function should work with the management in a non-confrontational way to achieve corporate legal and ethical compliance. This oversight function is typically delegated by the full board of Commissioners to the audit committee, which such oversight includes ensuring that quality accounting policies, internal controls, and independent and objective outside auditors are in place to deter fraud. Briefly, this oversight function is addressed to anticipate financial risks and to promote accurate, high quality and timely disclosure of financial and other material information to the board, to the public markets, and to shareholders.

In sum, an active, sophisticated, skilled, diverse and -importantly- independent BoC that follows effective board processes is best positioned to ensure that the corporation's assets are being put to their most productive use.

Independent Commissioner

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:

1. The Commissioner is not a member of management;
2. 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;
3. 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;
4. The Commissioner is not a principal of a professional adviser to the company or another group member;
5. 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;
6. The Commissioner has no significant contractual relationship with the company or another group member other than as a commissioners of the company;
7. 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:

1. The Independent Commissioner has no affiliation relationship with the controlling shareowner of the company;
2. The Independent Commissioner has no affiliation relationship with the director and or other commissioners of the company;
3. The Independent Commissioner has no double position as the director in other companies affiliated to the related company;
4. The Independent Commissioner should understand capital market laws and regulations;
5. 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.

Regulatory Framework of GCG Implementation Indonesia

Law is an essential factor as an instrument in the frame of GCG implementation in Indonesia. GCG enforcement was realized as a strategic action towards Indonesia’s economic healing after a great economic recession in 1998. Nowadays, GCG implementation is a mandatory which should be conducted by companies in Indonesia as a form of awareness towards global market competition In this respect, Law plays an important role to the effectivenes of implementing GCG. Therefore, whether in the practical level or technical laws and regulations, the prevailing regulation shall be responsive to ensure legal certainty to all stakeholders especially for business society which urgently needs to implement GCG to increase its competitiveness and professionalism.

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”)

The Board of Commissioner’s role is to supervise and to give advice on the management activities undertaken by the Board of Directors. The BoC has the authority to:

• 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”)

The Board of Directors is responsible for managing the company in the best interest of the GMOS. The BoD has the duties to:

• 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:

1. 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;
2. Kep-29/PM/2004, Regulation No. IX.1.5 - regarding the establishment and guidelines of the Audit Committee practices;
3. Kep-63/PM/1996, Regulation No. IX.1.4 - regarding the establishment of a Corporate Secretary;
4. Kep-38/PM/1996, Regulation No. VIII.G.2 – regarding the Annual Report.
5. 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:

1. Bank Indonesia Regulation Number 5/8/PBI/2003 concerning the implementation of Risk Management for Commercial Banks
2. Circular Letter Number 8/9/Pbi/2006 regarding the Implementation of Risk management for Commercial Banks
3. 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
4. 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.

Introduction to Corporate Governance

A. Agency Theory

The central issue of corporate governance stems from the separation of ownership and control.
Most organizations, whether in public sector, business or non-profit entities, have boards of directors and/or commissioners which oversee the performance of the organization and serve as an intermediary to the owners or other stakeholders.

Boards are in a delicate position of translating expectations of the owners into organisational performance, and in larger organisations, are not involved in the day-to-day management of the organisation. Boards are authorised to make decisions on high-level policies and transactions of a company, and yet must delegate authority to implement policy without jeopardizing accountability.
The common issues boards face in overseeing management were first comprehensively discussed in the Agency Theory[1].

The Agency Theory explains how to best organize relationships in which one party (the principal/ the owners) determines the work, which another party (the agent or board) undertakes. The theory argues that under conditions of incomplete information and uncertainty, which characterize most organisational settings, two agency problems arise: adverse selection and moral hazard. Adverse selection is the condition under which the principal cannot ascertain if the agent accurately represents the work he is being paid to do.

Adverse selection may lead to a lack of transparency in the use of funds or improper balancing of the interests of, for instance, shareholders and managers and of controlling and minority shareholders. Moral hazard is the condition under which the agents may seek to maximize their own self-interest at the expense of the principal.
Developing good regulations and practices on governance involves aligning the interests and controlling actions of Principal and Agent to avoid moral hazzard and adverse selection.

B. Corporate Governance Principles

The term of "Corporate Governance" is subject to many varying definitions. Broadly viewed, the FCGI defines Corporate Governance as "a set of rules that defines the relationship between shareholders, managers, creditors, the government employees and other internal and external stakeholders in respect to their rights and responsibilities, or the system by which companies are directed and controlled." (taken from Cadbury Committee of United Kingdom) In addition, FCGI also a points out that the objective of Corporate Governance is "to create added value to the stakeholders." More narrowly, the terms of Corporate Governance can be used to describe just the role and practices of the board of executives/the board of directors, the board of commissioners, managers, and shareholders.

There are four essential elements of Corporate Governance elaborated by the OECD (Organization for Economic Co-operation and Development). The elements are:

1. Fairness. Ensuring the protection of shareholder rights, including the rights of minority and foreign shareholders, and ensuring the enforceability of contracts with resource providers.
2. Transparency. Requiring timely disclosure of adequate, clear and comparable information concerning corporate financial performance, corporate governance, and corporate ownership.
3. Accountability. Clarifying governance roles and responsibilities, and supporting voluntary efforts to ensure the alignment of managerial and shareholder interests, as monitored by the boards of directors (or board of commissioners in Two Tiers System, FCGI)
4. Responsibility. Ensuring corporate compliance with other laws and regulations that reflect the respective society's value.
   (OECD Business Sector Advisory Group on Corporate Governance, 1998)
   

A corporate governance system specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the Board of Directors and/or Commissioners, shareholders and other internal and external stakeholders (employees, creditors, government) and spells out the rules and procedures for making decisions on corporate affairs[2]. By doing this, a structure for objective setting and monitoring performance is determined.

Recent high profile scandals in the private sector in various countries and more wide-spread financial crises have focused attention on the role of corporate boards in providing direction and oversight, and on the need for robust governance practices and regulations. There are however significant differences in countries’ legal and regulatory frameworks that shape corporate governance systems.

While governance systems differ around the globe, it does not necessarily mean that the companies under the different governance systems perform better or worse. Instead, the returns are disproportionately channeled to insiders, accompanied with expensive expansion into unrelated business, high leverage and risky financial structures[3].

For example, Low corporate transparency, such as non compliance with disclosure requirements and shareholder equality, contributed to extensive group structures and diversification, and risky financial structures[4].

Consequently, many jurisdictions including Indonesia, new regulations are evolving to increase disclosure of corporate information, in an effort to increase transparency and accountability among publicly listed companies[5].

C.The Benefits of Corporate Governance

Two recent academic studies further demonstrate the significant positive financial implication good corporate governance has for companies.

A study of 1500 public companies in the United States in the 1990s found that those who received a higher governance rating and stronger shareholder rights also had:

• higher firm valuations
• higher profits
• higher sales growth
• lower capital expenditures[6]
  

In a study of debt markets, which analysed 2002 governance data from companies registered with the US Securities and Exchange Commission, found that a hypothetical medium size firm with $934 million of outstanding debt could potentially create savings of USD $74 million (8%) per year, depending on the spread between investment grade and speculative grade on 10-year bonds. At the time of the study, the spread was about 800 basis points.
The study identified the following variables that significantly influenced credit ratings:

• majority of shareholders own less than 5% of the company;
• more transparency in financial disclosure;
• a higher percentage of board directors are deemed to be independent;
• less CEO power on the Board;
• more stock ownership among directors; and
• greater director experience and expertise as measured by the number of appointments to other Boards[7].
  

Policy makers are also increasingly aware of the contribution good corporate governance makes to financial market stability and efficiency, investment and economic growth. Good corporate governance can contribute to economic development in that it provides efficient intermediation and allocation between an economy’s savings and productive uses of these resources in the corporate sector. Corporate governance rules also ensure that these resources are properly monitored.

To guide countries in the process of developing stronger governance structures, the Organisation for Economic Cooperation and Development (OECD) in 1999 published The OECD Principles of Corporate Governance, which have become the internationally accepted principles for governments to evaluate and improve the legal, institutional and regulatory framework for corporate governance, and provide guidance and suggestions for stock exchanges, investors, corporations and other parties. An updated version was issued in 2004 to reflect further governance developments in OECD countries. The OECD principles have served as a basis for national level governance codes in many countries, including Indonesia.

The latest 2004 revision of the OECD Corporate Principles of Corporate Governance[8]
Ensuring the basis for an effective corporate governance framework
The corporate governance framework should promote transparent and efficient markets, be consistent with the rule of law and clearly articulate the division of responsibilities among different supervisory, regulatory and enforcement authorities.

The rights of shareholder and key ownership function
The corporate governance framework should protect and facilitate the exercise of shareholders’ rights.

The Equitable Treatment of Shareholders
The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights.

The Role of Stakeholders in Corporate Governance
The corporate governance framework should recognise the rights of stakeholders established by law or through mutual agreements and encourage active cooperation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.

Disclosure and Transparency
The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company.

The Responsibilities of the Board
The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders.


The corporate governance movement is currently developing international government principles that are concerned at the highest and broadest level with holding the balance between economic and social goals and ensuring accountability for the stewardship of those resources.[9]

[1] Eisenhardt, K. “Control: Organisational and Economic Approached.” ”, (Management Science, vol. 31, no. 2. (., February 1985). pp. 134 – 149.

[2] Definition derived from the Cadbury Committee of the United Kingdom. The Cadbury Committee was set up by the Bank of England and the London Stock Exchange and was chaired by Sir Adrian Cadbury in 1991.
[3] Claessens, Stijn and Joseph Fan. “Corporate Governance in Asia: A Survey.” University of Amsterdam Working Paper. (2003).

[4] Claessens, Djankov and Lang. “Who Controls East Asian Corporations?” World Bank Working Paper. (1999).
[5] Utama, Siddharta. “Corporate Governance, disclosure and its evidence in Indonesia.” Usahawan, No. 5 XXXII. (2003).

[6] Gompers, Paul, Joy Iishi, and Andrew Metrick. “Corporate Governance and Equity Prices.” Quarterly Journal of Economics. 118 (1). (2003), pp. 107-155.

[7] Ashbaugh, Hollis and Daniel Collins and Ryan La Fond. “The Effects of Corporate Governance on Firms’ Credit Ratings.” Journal of Accounting & Economics. (2003).
[8]OECD website: http://www.oecd.org/dataoecd/32/18/31557724.pdf

[9] Speech by Sir Adrian Cadbury and Ira Millstein at the 10th Annual International Corporate Governance Network July 8, 2005.

Improving Good Governance through E-Procurement

Last March 23, 2008 President Soesilo Bambang Yudhoyono issued a Presidential Decree No. 34/M/2008 appointing former Secretary General Department of Public Service Mr. Rustam Sjarief to chairing Government Institution for Procurement of Goods and Services. This institution is expectedly to review and analyze government’s policies on goods and services procurement in order to ensure that government’s procurement procedures runs both transparently and accountably as well as to reduce state losses.

Government is seemingly very concern on the improvement of procurement since procurement is very sensitive from corruption, collusion and nepotism as well as any other unwanted practice. It is still fresh on our memory when a number of official from the Election Committee sent to jail due to stated guilty in misconduct procurement process for election logistic. It should be admitted that in all process of tender or auction for procuring goods and services in government, state owned enterprises and private company are sensitive of misconduct which triggering violation of law particularly corruption. Therefore, it is essential to develop a system which will minimize any violation which might emerge during procurement process.

One of the procurement systems which are considered to be national procurement system is e-procurement on e-commerce transaction basis. E-procurement system is believed can minimize above unwanted practices since the process is very transparent, fair and very practice. E-procurement is in line with the spirit of good governance implementation particularly its fairness and transparency either in public and private sector. Transparency is one of the major pillars for implementation of good governance. Transparency can reduce uncertainty and can help inhibit corruption among public officials. E-procurement system is undoubtedly very simple, straightforward and less time consuming. Government can use e-procurement procedure in both department and non-department institution as well as state owned enterprises rather than convention procurement system which very sensitive to corruption, nepotism and other unwanted practices.

In line with the spirit of developing e-procurement on e-commerce transaction basis, last March 25th, Indonesia’s law maker have officially ratified law Number 11 year 2008 regarding Information and Electronic Transaction (UU ITE) after around five years in consolidation. This law expectedly will provide legal protection of matters related to information technology, communication, and/or the electronic transaction including e-procurement, specifically regarding authentication and legal actions processed in the internet network system (e.g.: a business contract signed using an electronic signature and sent using an e-mail service). It is due to come in effect on the April 1st, and presently, Cyber Crime bill is also being consolidated by the police department as a follow-up to the UU ITE ratification. To support the existing legal basis on information and electronic transaction, government is now finalizing the draft of Presidential Decree regarding electronic procurement.

E-procurement itself can be defined as a business-to-business or business-to-consumer purchase and sale of supplies and services through the internet as well as other information and networking systems, such as Electronic Data Interchange and Enterprise e source planning. Typically, e-procurement web sites allow qualified and registered users to look for buyers or sellers of goods and services. Depending on the approach, buyers or sellers may specify costs or invite bids. Transactions can be initiated and completed. Ongoing purchases may qualify customers for volume discounts or special offers. E-procurement software may make it possible to automate some buying and selling. Companies participating expect to be able to control parts inventories more effectively, reduce purchasing agent overhead, and improve manufacturing cycles. E-procurement is expected to be integrated with the trend toward computerized supply chain management.

Now, there are several things that government needs to do to implement effective e-procurement. First, Legal umbrella. As abovementioned that the law on information and electronic transaction has been issued by law maker and ratified by government. However, for implementation of e-procurement, government should specifically issue an implementation regulation since the law on information and electronic transaction is still providing general provision of any electronic transaction on e-commerce basis. The implementation regulation is urgently required for legal certainty of e-procurement transaction.

Second, Information and communication technology tools and applications should be well provided. The high growth of development of information and communication technology (ICT) plays an important role in supporting e-procurement system. However, human resources behind the ICT tools are equally essential to be prepared. This actually one of the biggest challenge for government since preparing a good human resources is not such an easy task for our government. It seems useless to provide sophisticated ICT devices without preparing good human resources.

Third, government must have a clear strategy to overcome the barriers to change. Part of the strategy is to engage in a rigorous assessment of the current situation, the reality on the ground and the inventory of projects, articulate costs, impacts and benefits of programme as well as continuously monitor and evaluate the project upgrading. Borrowing a lesson from the private sector, e-Procurement must be customer-driven and service oriented. This means that a vision of e-Procurement implies providing greater access to information as well as better, more equal services and procedures for public and business.

Good Corporate Governance and Environmental Awareness

Corporate Governance has always been an everlasting actual issue among business man, academic, policy makers and etc. The academic studies toward 1500 public companies in the Unites States in the 1990s found that those who received higher governance rating and stronger shareholder rights also has higher firm valuations, higher profits, higher sales growth and lower capital expenditures. It also shows that good corporate governance delivered a significant positive financial implication of good corporate governance from the company’s perspective[1]. Implementation of good corporate governance is supported by four major foundations namely transparency, accountability, responsibility and independency. Discourses on corporate governance have been widely growing from solely separation between share ownership and control holder in a modern company to any factors that will influence a company’s sustainability.

One of the discourses that lately emerged in the issue of good corporate governance implementation in particular in Indonesia is the awareness of a company to environmental sustainability. For some time there has been debate on how a company should manage the environmental sustainability and what would be the influence of its duty to the growth of business performance and whether there is a link between good corporate governance and environmental issues. Nowadays, the debate over the existence between the implementation of good corporate governance, environmental responsibility and business performance is no longer considered as such a fruitful discourse. Researches carried by Innovest Strategies Value Advisors have proven that the implementation of good corporate governance has a strong correlation in the participation of a company in managing environmental sustainability. Those companies maintaining their environmental risks and impacts are more sustainable, valuable, profitable and competitive.[2]

The discourse has been going changed rather than just debates into the implementation of corporate governance for environmental sustainability. Lately, Credit Lyonnais Securities Asia (CLSA), an award-winning brokerage, investment banking and private equity group in the Asia-Pacific has announced their annual report with the progress of corporate governance among the companies in Asia. Interestingly, they have made a major change in this year’s report namely the inclusion of a corporate governance score on a company’s sensitivity to environmental issues, particularly on climate change. Good Corporate Governance in this report goes beyond solely financial performance. A company with good governance doesn’t only display satisfactory financial data and share the returns equitably with all of its investors, but also the company’s concern on its social and environmental surrounding.

Indonesia is ranked at the bottom three in its sensitivity to the environmental issue together with Philippine and China. Even so, the present government’s anti-corruption drive is yielding some results. In contrast to the Philippines, Indonesia continues to try to improve its corporate governance regime through, for example, revising its national code of best practice and bringing in a new corporate governance code for banks.
These issues should be of great concerned for the government of Indonesia which will host a world conference on global warming and climate change in Bali in December 2007. As a host we do expect success but the point is whether Indonesia has great concern on environmental sustainability by really implementing good corporate governance in all sectors whether Private-Owned Enterprises (POEs) or State-Owned Enterprises (SOEs). Also Indonesia is still considerably not serious in the enforcement of environmental law. It is proven that the number of illegal logging is still high even though some efforts are made by the Indonesian government. Meanwhile the actors of illegal logging are still not prosecuted or have been intervened by some government official. The case of Adelin Lis, an illegal logger suspect who have been acquitted by Medan District Court of all charges is one of these examples. It is clear that from the very beginning, some irregularities could be seen in this case. Adelin is now again being a most wanted person for another charge as he is convicted for some money laundry cases

The Indonesian government shall seriously take concern together with other stakeholders in search of figuring out on how to cope with Indonesia’s environmental problems. The problem will not resolve itself by only screaming jargons on environmental care but also to have to be implemented into strict regulation in all sectors. The implementation of these environmental care regulations needs the participation all parties whether government, policy makers and citizens. The result might not be noticeable in short time but slowly and surely if all guidelines on good corporate governance regarding environmental care are carried out, hopefully we can see a blue and clean sky over Indonesia.

[1] FCGI publication, Corporate Governance Vol. 1 taken from Gomper, Paul, Joy lishi, and Andrew Metrick. “Corporate Governnace and Equity Prices.” Quarterly Journal of Economics. Vol. 118 (1). (2003), PP. 107-155.

[2] Please see. http://www.innovestgroup.com/pdfs/2004-11-09-Environmental_Governance.pdf.