DEVELOPING DIRECT INVESTORS INTO INDONESIA: A COMPARATIVE STUDY TO UNDERSTAND THE INDONESIAN LAW OF GOOD GOVERNANCE IN CONTEXT
OF DIRECTORS DUTIES IN THE PRUDENT INVESTMENT DECISION PROCESS
BY
Benjamin Halliwell, Ni Ketut Sipasti Dharmawan, Ni Nyoman Supariyani Bhalliwell123@gmail.com , arasswk@yahoo.com, anisupariyani@yahoo.com
Abstract
Encouraging foreign investors in the framework of investment activities into Indonesia is not mere-ly concerning compliance and construction of domestic law based on the notions of international law as well as BIT, but for the practical matter it is likely should consider various important ele-ments such as understanding the cultural, historic, geographic and demographic concerns of the In-donesian counter party and InIn-donesian institutions as well as contract. In the application of these notions in domestic law, is an imperative that cannot be overlooked in prudent investment decision making. In the Indonesian context, sound investment activities will develop with desired outcomes if there are exists not only a harmonization between the international legal construct and but an un-derstanding good corporate governance for the duties and responsibility of the Boards that build from a bottom up perspective. An adversarial, ring fencing approach to the construction of opera-tions in the light of Indonesian law will fail due to a failure to understand the intricacies of the polit-ical reality and customary responsibilities of its custodians. Based in fiduciary duty by statute, the interpretative measures of directors duties and their obligation to Indonesia, must be equally ad-dressed along with the commercial profit seeking operatives, in the mind of the director. The for-eign direct investment decision maker should ensure that the Director‟s representing the construc-tion of the associate capital undertake a deep engagement and understanding of the regional and cultural custom and it‟s local interplay with Indonesian law as an initial function of the investment and maintain that function as a critical operation of director duties over the term of the investment. At a minimum, the environment, social, political and local economic context should be assessed and where appropriate engaged. From the foreign investment perspective, we argue that this process will drive more efficient outcomes.
1. Introduction:
1.1 Research Background
Indonesia encourages foreign direct investment and has of recent years been a beneficiary of growth
in foreign direct investment. Bilateral investment agreements are a common method of this
transi-tion. Presently, Indonesia is not a party to any international convention for the enforcement of
for-eign court judgments and the legal system‟s bias is to protect legal sovereignty. Indonesian law is
thus a default position. Our contention is that as such the Indonesian law of good governance as
in-vestment.
Indonesia has a stated objective of accelerated economic growth of between 7-9% of gross domestic
product growth each year to position itself as a top ten advanced economy globally by 2025 as
op-posed to its present OECD ranking of 171. In context, according to the 2015 OECD economic
sur-vey2, the country has a population of 249.9 M people, a GDP growth rate of 5.5% pa and an
unem-ployment rate of 6.2% pa and an annual inflation rate of 6.4% pa.
Indonesia must attract foreign investment to meet it‟s economic development objectives. In this
ambition at a macro economic perspective and recent data suggests that Indonesia is proving to be
successful. Indonesia‟s Investment Coordinating Board suggests growth of 17.5% in foreign direct
investment (FDI) in the fourth quarter (year-on-year) 2014.3 Thus growth has been driven by
sec-torial targeting. It has been noted however that this,“is occurring without improvements to its
in-vestment environment or competitiveness,4” citing matters such as to further restrict rather than
open up the negative investment list, Daftar Negatif Investasi, announced by Badan Kordinasi
Pe-nanaman Modal (BKPM) chair Mahendra Siregar in December 2013. Indonesia seeks foreign
capi-tal however the modality of its transition into microeconomic efficiency is challenged by foreign
perception of investment law surety.
Foreign capital seeks surety of its tenure. Prior to an interrogation of investment performance, it is
incumbent upon capital investment decision makers to ensure that the enforceability, stability and
certainty of rights and obligations of contract. Indonesia tolerates the objectification of law
1
Ministry of National Development Planning/ National Development Planning Agency, “Masterplan for Acceleration and Expansion of Indonesia Economic Development 2011-2025,” Coordinating Ministry for Economic Affairs 2011, 9-11.
2
OECD, “ OECD Economic Suverys: 2015,” OECD Surveys 2015, <https://data.oecd.org/indonesia.htm>. 3
Shiro Armstrong, Sjamsu Rahardja, “Survey of Recent Developments,” Bulletin of Indonesian Economic Studies, Vol. 50, No. 1, 2014: 3.
4
ing to prudential governance of investment within the Indonesian economy. It has done so by
seek-ing to harmonise investment and corporations law with international standards. Whilst the country
has not ratified any international convention to give enforcement to foreign adjudication, companies
may prefer non Indonesian law by agreement in contract, Article 1338(1) of the Indonesian Civil
Code, a principle of freedom of contract. Bilateral investment treaties, nominating international
legal convention are thus a common mode of contractual construction to attract private foreign
capi-tal. Further, Indonesia is a member of the world trade organization (WTO) with its Annexes
Intel-lectual Property, GATS and TRIMs is a signatory to many schedules providing protection to
inter-national convention of notions such as investment activities.Interinter-national convention however is not
law in Indonesia until it is ratified. Despite Article 1338 (1), Indonesian courts may apply
Indone-sian law. Indonesia Law No.30 of 1999 concerning provides for Arbitration and Alternative
Dis-pute Resolution as a preferred model for disDis-pute resolution over litigation, however a foreign
arbi-tral award may only be enforced after recognition from an Indonesian court by the issue of an
exe-quatur. There is thus a high degree of protectionist policy at play in Indonesia.
We will not consider the reason for this determination, but acknowledge that Indonesian macro
economic policy understands that statistically, “the message to developing countries therefore is
that succumbing to the obligations of BITS does have the desired payoff of higher FDI flow,5”
trades against the protectionist policy armed by Indonesian law. Thus the limited functionality of
the harmonisation of law in Indonesia provides an affective environment where Indonesian law is
the probable default in contract surety, certainly in dispute resolution.
Beside the legal certainty both based on the compliance to the international treaty, BIT, or by
con-tract, the important element to push the development of economic growth from the perspective of
5
foreign investment is the existence of Good Corporate Governance (GCG), including GCG in order
to Director running his role and duties.
An understanding of good governance, as promoted by Directors duties towards the shareholder and
creditor of an investment is thus critical by there incumbents and is a key factor of the foreign
in-vestment decision. This is highlighted as a key matters for bureaucracy reform in the Masterplan for
Acceleration and Expansion of Indonesia Economic Development 2011-2025, citing, “Building a
commitment to the implementation of good governance.6”
We will analyse the Indonesia directors duties facilitating foreign investment in Indonesian as by
comparison to the model in Australia. Our context will be by considering the role of Directors
du-ties role in good governance as a surety aspect of the investment decision making process.
1.2 Legal Issue:
As it mentioned above in this paper will be analyzed the issue concerning how the directors duties
assuring good governance in Indonesian compared with Australian from the perspective of
attract-ing foreign investment.
1.3. Purpose
The purpose of this research is to analyze the existence of good corporate governance principles
under Indonesia investment law as well as Australian law especially for the role and the duties of
the Directors in order to attract foreign investment capital in relation to improve the pa of
Indone-sian economic growth.
6
1.4. Methodology
This research employs the normative legal research by using statute approach, conceptual approach,
analyze approach and case approach.
II. What is the legal framework for foreign investment into Indonesia?
2.1.International Standard
Indonesian law seeks to protect the sanctity of foreign capital diluting geographic risk by restricting
compulsory acquisition to that being of market based compensation. Indonesia is developing a
no-tion of being an attractive region in which to invest climbing global rankings of a place in which to
invest.7.
Law No. 25 of 2007 regulates foreign investment into Indonesia. The investment laws require that
the investment mechanism is by incorporation, one established with foreign capital is called a PMA
company. The PMA company is identified in incorporation and liability laws, Law No 40 of 2007
and in investment law.
The new Indonesian investment law (Law No. 25 of 2007) actually exists as a compliance to
inter-national obligation of Indonesia as being a member of WTO-TRIMs Agreement. In general the
main principles of WTO such as non discrimination with the MFN and NT principles as well as
transparency principles have already cover under the Indonesian investment Law. However, the
de-velopment of Indonesian investment law established with long story from more domestic legal basis
until complies to international obligation.
In the late 1980s, there was a significant increase in foreign direct investment throughout the
world. However, some of the countries including Indonesia in general receiving foreign investment
imposed numerous restrictions on that investment designed to protect and foster domestic
7
tries, and to prevent the out flow of foreign exchange reserves. Those measures restrictions
includ-ing local content requirements (which require that locally produced goods be purchased or used),
manufacturing requirements (which require the domestic manufacturing of certain components),
trade balancing requirements, domestic sales requirements, technology transfer requirements,
ex-port performance requirements (which require the exex-port of a specified percentage of production
volume), local equity restrictions, foreign exchange restrictions, remittance restrictions, licensing
requirements, and employment restrictions, in fact it considered as violation of GATT Articles III
and XI, and are therefore prohibited. An addition, finally Indonesia as well as other countries
be-comes a member of WTO in 1994 where the nature of WTO Agreement adopted from GATT. As a
result, therefore Indonesia should comply to International obligation in attracting foreign
invest-ment especially as part of TRIMs Agreeinvest-ment then further known as liberalization era. Until the
completion of the Uruguay Round negotiations, which produced a well-rounded Agreement on
Trade-Related Investment Measures (hereinafter the "TRIMs Agreement"), the few international
agreements providing disciplines for measures restricting foreign investment provided only limited
guidance in terms of content and country coverage. Fortunately, TRIMs Agreement explicitly
pro-vide the law for the member to comply with the National Treatment Principles as part of non
dis-crimination system as underpin can carry out better atmosphere for future investment sector.
Another regime also provides international basis for better improvement of investment activities
including the principles of good corporate governance is the OECD. The OECD Code on
Liberali-zation of Capital Movements, for example, requires members to liberalize restrictions on direct
in-vestment in a range of areas. The OECD Code, however, is limited by the numerous reservations
made by each of the members. In addition, there are other international treaties, bilateral and
multi-lateral, under which signatories extend most favoured nation treatment to direct investment. Only a
few such treaties, however, provide national treatment for direct investment. The Asia Pacific
Eco-nomic Cooperation Investment Principles adopted in November 1994 are general rules for
As a member of WTO-TRIMs Agreement, Indonesia has ratified the WTO-TRIMs Agreement in
1994 and its compliance to international obligation set up under investment law since 2007. There
are some international standards such as: The National Treatment Principles, Transparency, Legal
Certainty, as well as Accountability clearly exist under Article 3, Article 4, and Article 6 of the Law
No. 25 of 2007.
Foreign direct investment must be approved by the Indonesian Government, generally, through the
Badan Koordinasi Penanaman Modal (BKPM) a board that coordinates and monitors foreign direct
investment, the notable exceptions being the in banking and finance and upstream oil and gas. The
PMA must adhere to the various licensing regimes, depending on the nature of the business and the
fiscal construction it's operations.
The common form of indirect foreign investment is through the Indonesian bourse and controlled
by the Otoritas Jasa Keuangan (OJK). The effect of publicly listed entities and the foreign control
issue is under discussion in Indonesia with Regulation 5/2013 under a state of review. Objectively,
the BKPM holds a monitoring role as to the notion of such investment structures.
By understanding the new Indonesian investment law, currently it can be considered that Indonesia
has not only complied to TRIMs but also it has respected and complied to good corporate
gover-nance principles as developed by Organization for Economic Co-Operation And Development
(OECD). As ruled on the basis of OECD Principles of Corporate Governance 2004, it can be
un-derstood that corporation including investment capital corporation shell subject to principles of
good corporate governance namely: Ensuring the Basis for an Effective Corporate Framework, The
Right of Shareholders and Key Ownership Function, the Equitable Treatment of Shareholders, the
Re-sponsibilities of the Board.8 With regard to banking sector, the primary objective of corporate
go-vernance should be safeguarding stakeholders‟ interest in conformity with public interest on a
sus-tainable basis. Among stakeholders, particularly with respect to retail banks, shareholders‟ interest
would be secondary to depositor‟ interest.9 .
In General the GCG is …the framework of rules, relationship, system and process within and by
witch authority is exercised and control in corporation.10 In addition, foreign investors without
doubt will invest their capital in the countries that ruling and implementing GCG principles
consis-tently.11 By assessing the important role of GCG in order to attract foreign investment it can be
considered that although Indonesia is not a member of OECD Convention, Indonesia has
respect-ing and adoptrespect-ing the good corporate governance code imposed by OECD under investment Law
(Law No. 25 of 2007), Indonesian Limited Liability Company Act (Law No. 40 of 2007)
includ-ing corporate conduct for the Board of Director and other related laws more importantly at the
fi-nancial matter and banking sector .
2.2 Bilateral investment treaties (BITs)
Bilateral Investment Treaties are a function of International law with the objective to pursue
har-monisation of laws to an international standard, designed to provide key foreign investment
deci-sion makers with legal certainty in the construction of enterprise. A persuasive ambition is for
supply side ambition is to assure internationalisation of dispute resolution. On the demand side of
capital, usually in developing economies, the BITs are a tool to encourage and compete for
8
OECD (2004), OECD Principles for Corporate Governance, OECD Publication Services, Paris, p. 17-24. 9
Basel Committee, 2015, Guidelines Corporate Governance Principles for Banks, BIS Publication (Bank for Interna-tional Settlement), p.3.
10
Tony Ciro, 2013, Corporation Law in Principles, Thomson Reuters (Professional) Australia Limited, p. 115. 11
vestment12 and establish the ground rules for trade relations whilst internal reform is taking place.
The original construction of Bilateral investment treaties is Article 2(1)(a) of the Vienna
Conven-tion on the Law of Treaties (VCLT) thatdefines them as an expressed international treatybetween
States, governed by international law13. A key focus of the bilateral agreement is often concerns
dispute resolution. In Indonesian dimension, the legal basis of BIT is stipulated under Article 6 (2)
of the Law No. 25 of 2007.
Contracts may elect non-Indonesian law. Such a choice will ordinarily be honoured by Indonesian
courts by function of Article 1338 (1) of he Indonesian Civil Code. Nevertheless, the court can
ap-ply Indonesian law.
Indonesia is not a party to any international convention that allows enforcement of foreign court
judgements, they are thus not enforceable in Indonesia. Indonesia, progressively, encourages
arbi-tration in dispute resolution. Law No.30 of 1999 Arbiarbi-tration and Alternative Dispute Resolution
provides for the principal, designed to reduce judicial burden and to provide finality in dispute.The
benefit of this approach is that it reduces the intervention of courts, reduces the judicial burden
and to assure arbitral award finality.
Indonesian arbitration Law does not follow the United Nations Commission on International Trade
Law (UNCITRAL) Model Law. It is possible to exclude Indonesian jurisdiction join preference for
foreign arbitration. However, Indonesian Arbitration Law only recognises a foreign arbitral award
once an Indonesian court has recognised the award through the issue of „exequatur‟. Thus whilst
12
Mathius Busse, Jens Koniger and Peter Nunnenkamp, “FDI Promotion through bilateral investment trea-ties: more than a bit?” (2010) 146 (1) Review of World Economics 147, 148.
13
significant regulatory environment exists to support a foreign judgement in arbitration, enforcement
faces a number of difficulties the most significant of which is the difficulty in Indonesian court
pre-dictability.
The parties to the agreement define the scope and diversity of the clauses14.
Internationalisation of law brings along with it notions of bureaucratic advocacy as processes of
dispute resolution given its nature. Whilst the intent and function maybe that a ruling, which has
taken place in a third nation in an international tribunal, Indonesian law construction is such that
the ability of enforcement is ultimately a function of diplomacy due to the failure to ratify
ac-knowledgment of international arbitration ruling.
An analysis of that case Indonesia‟s preference to maintain legal sovereignty is not a mere
nepotis-tic function, they herald back to matters of domesnepotis-tic perception of equity and an internal debate as
to nationalism against provincial authority. Nation building structures will at time give way to such
politics.
2.3 The cultural belief imperative
In preparation of this article the writers had the pleasure meet with Made Mangku Pastika, governor
(the governor) of Bali15. During this discussion the governor made a profound statement as to local
cultural relationship with economic development. He made two profound statements.
14
Todd Allee and Clint peinhardt “Evaluating Three Explanations for the Design of Bilateral Investment Treaties” (2014) 66(1) World Politics 47.
15
The first was that the local governing structure is different to other Indonesian jurisdictions and
ref-lective of the nuances of value systems of Bali and its over 1,000+ cultural villages. A Balinese
governor must be Balinese.
The second statement related directly to economic development. The governor made the affirmative
statement that any economic development will only progress in the context of the guiding local
val-ue system of Tri Hita Karani and Rwa Bhineda. Tri Hita Karani guides that all have a responsibility
to God, to good of (wo)man and to the environment. It is a tripartite system of equal weight and
must be harmonised in action. Raw Bhineda in the understanding that opposites are a manifestation
of themselves, everything has an equal and proportionate opposite. The governor made a statement
proposed as fact, economic development that fails any of these cultural notions will not advance.
Indonesia is vast country, the worlds largest archipelago, it is made up of 17,000 islands occupying
a total area of 1,904,569 square kilometres. Indonesia has the world 4th largest population. The
country is vast and its community construction is complex.
The investment decision maker should understand the following about the corporation law in
Indo-nesia:
a) Court proceedings can be lengthy;
b) It is not uncommon to find the statute in conflict;
c) The judiciary has a high degree of discretion; and
2.4 Bilateral agreements in context.
The matter of Churchill Mining Plc v. Republic of Indonesia ICSID Case No. & Planet Mining Pty
Ltd v. Republic of Indonesia, ICSID Case No. ARB/12/14 and ARB/12/14 and 12/40 provides some
insight into this notion.
In context, Indonesia‟s Law No.4 of 2009 on Minerals and Coal Mining governs the law of mining.
The licence based system came into effect in late 2009. These laws hold provision provisions
stat-ing that old minstat-ing law will be managed under transitional provisions thus honourstat-ing previous
go-verning law, contracts for works systems. The foreign investment consortia of East Kalimantan
coal mine at the heart of this matter was legally constructed in 2007. In rejecting the Indonesian
government‟s challenge to the jurisdiction of the International Centre for Settlement of Investment
Disputes (ICSID), the media reported the following comments, “Coordinating Economic Minister
Hatta Rajasa regretted the ICSID tribunal decision, and Industry Minister MS Hidayat called on
lo-cal administrations to be more cautious16,” further, “The Indonesian Resources Studies (IRESS)
said on Thursday that the government‟s decision to give local administrations the power to issue
mining permits to both local and foreign investors as part of the decentralization policy several
years had brought more harm than good to the country.17”
Churchill Mining Plc v. Republic of Indonesia ICSID Case No. & Planet Mining Pty Ltd v.
Repub-lic of Indonesia, ICSID Case No. ARB/12/14 and ARB/12/14 and 12/40 is an example of the
deli-cate nuisances in the gravitas in the value assigned to risk and its role in ordinary business. In this
matter the international consortia stated grievance in the construction of property, or lack thereof
given success in mining operations, opposed to the ideological and legal notion of the ownership of
16
Raras Cahyafitri and Ina Parlina, “RI risks loss in Churchill legal battle,” The Jakarta Post (online) February 27 2014,
<http://www.thejakartapost.com/news/2014/02/27/ri-risks-loss-churchill-legal-battle.html#sthash.qIZc4XGx.dpuf>.
17
land and a licensed right to use it, rightly a function of risk from the position of the Indonesian. In
this matter the consortia of Churchill and Planet were stripped of effective ownership of a coal
de-posit, proven by them to be globally significant in favour of Nusantra Group, a well-connected
company controlled by presidential candidate Prabowo Subianto, after a gratuity of US$40 million
had been paid. Nusantra Group made the case that the license to mine over the land had never been
legal relinquished. After the Indonesian domestic challenge exhausted the Churchill and Planet
con-sortia took the case to the ICSID claiming on US$2 Billion in damages18. Thus the perception from
your conviction is a matter of objective analysis. The consortia are aggrieved based on a position of
domestic nepotism and unfair legal administration upon asset seizure. The Indonesian perspective
seems to be that the matter has been dealt with objectively through the Indonesian legal system and
now the foreign consortia is seeking damages heinous to their perception of value19. According to
the commend reported by Mr Amir Syamsudin (Law & Human Rights) in 2014, it can be
assess-ing that in the adjudication case above, Indonesian government has a chance to succeed in the next
trials regarding the merit of the case. The government has strong evidence that it has not violated
the bilateral investment treaties, national law or international law. Letter on it can be understood
that the optimism of Indonesian government is supported by facts that investment claims made by
Churchill and Planet Mining Pty Ltd [Churchill‟s subsidiary] do not comply with and even violate
the Indonesian laws,20”
It would be imprudent for thedecision maker of foreign direct investment into Indonesia to consider
that Intentional convention will provide a sole basis in law as to the surety of the governing
18
Churchill Mining Plc v. Republic of Indonesia ICSID Case No. & Planet Mining Pty Ltd v. Republic of Indonesia, ICSID Case No. ARB/12/14 and ARB/12/14 and 12/40.
19 ibid. 20
Raras Cahyafitri and Ina Parlina, “RI risks loss in Churchill legal battle,” The Jakarta Post (online) February 27 2014,
ture of capital invested. Indonesian law is paramount. In recognition of this an understanding of
Indonesian good governance as assessed by an analysis of directors duties to the investor (or
credi-tor) should form part of the basis for prudent investment decision making. Our discussion will
ref-erence against the Australian construction as a basis of comparison.
III. What are the duties of director in carry out good governance for investment capital?
3.1.How is the obligations process assured?
Directors of incorporated entities have dual role. The commercial role of improving the
perfor-mance of the company and the legal requirement to comply with legal duties. The duties exist to
protect the shareholder (creditor) form the risk of directors harming the company. Foreign direct
investment into Indonesia must be constructed via a PMA company (Foreign Direct Investment
Company) which is subject to Indonesian law.
In regard to the duty of PMA Company Director, the Law No. 25 of 2007 concerning Indonesian
Investment Law is silent. However, it can be drawn the legal basis by assessing the Indonesian
Company Law (Law No. 40 of 2007). Therefore, Law No 40 of 2007 maintains that Directors of a
PMA company.
Law No 40 of 2007 maintains that Directors of a PMA company. Indonesian companies provide
dual process for governance. The Board of Commissioners (Dewan Komisaris) supervises the
per-formance of directors. The board of directors (Direksi) manage the companies operations and
A foreigner owned company may have foreign directors and commissioners. If so there are specific
executive roles in the company that must be held by an Indonesian. The BKPM may recommend
that at least one director is Indonesian21.
i) The Australian perspective.
The hallmark of the relationship between the director and investor (creditor) in Indonesian law is
fiduciary duty. The fiduciary duty is significant but not the sole responsibility in the Australian law.
The source of law for directors duties in Australia is general law and statutory law, Pt 2D.1 of the
Corporations Law. They overlap.
The Australian Legislation22 codifies the duties owed by directors to investors, including legally
constructed foreign investment. They are academically, these statutory duties are grouped as, a)
The duty of care, skill and diligence, b) the duty to act in good faith and proper purpose and c) the
duties of conflict of interest and disclosure.
The duties of care, skill and diligence describe the high standards to which the functions and
exer-cise of powers of office and to prevent insolvent trading of the company, which is a requirement
that must be viewed broadly. The source of law is contract law (if exists), general law and s180 (1)
of he Corporations Act 2001 (Cth).
The duty of loyalty and good faith and proper purpose describes the high standard to which the
di-rector must comply when exercising the discretions and power of office. The didi-rector has a
fidu-ciary obligation not to take advantage of their special position. This includes dealing with the
inter-est of the company as a whole, to avoid potential conflicts, to robustly use discretion as a matter
allows and exercise power for proper purpose.
21
Widyawan & Partners, Allens, “Legal guide to investment is Indonesia, 2014,” Widyawan & Partners, Allens, 16.
22
The duty to act in good faith and to us power for proper purpose in the interest of the company has
its source in law principally in Equity, “fiduciary law,” and sections 181 and 184 of the
Corpora-tions Act 2001 (Cth). The duty to use powers for proper purpose.
The duty to avoid conflicts of interest is strict. It is sourced in general law as a function of fiduciary
law and ss 182 - 184 of the Corporations Act 2001 (Cth). The duty gives rise to disclosure
obliga-tions depending on the status of the company.
The Australian Securities and Investments Commission (ASIC) holds the primary governing power
as to the operation of law in good governance pertaining to Investment in Australia and holds
en-forcement rights. This organisation works hand in glove with Australian Prudential Regulatory
Au-thority (APRA) and to some degree the Australia Tax Office who complete the regulatory and
en-forcement structure within the Australian economy.
ASIC has stated the following generalisations as to the requisite duties of a director:
1. Understand the business of the company;
2. Understand the financial position of the company;
3. Read the information provided;
4. Apply an enquiring mind;
5. A director's responsibility is not limited to his orher field of expertise;
6. There is a difference between an executive director and a non-executive director;
7. Directors cannot delegate their opinion where it is required;
8. Delegate responsibly;
9. Act honestly and do not use position for personal advantage;
10. Handle conflict of interests appropriately.23
23
ASIC play an important role as model litigant in Australian corporations law.
On the face of it, these notions are evidentiary however the law pertaining to the question of
grav-ity is a recurring theme in Australia. By no means has the governing investment environment
proven to be perfectly robust, failure underlying the seminal cases below, at the least, are
demon-strative. The critical observation in the Australian context is that the laws governing directors
du-ties in the context of good governance, providing surety to investment is a) driven by a
nationalis-tic agenda, b) under poignant judicial review and c) is presently weighted towards the rights of
the investor.
The earnest and gravity to which directors must met these obligations has been a topical matter
for courts. What is the requisite standard? The pendulum has oft swung between in an attempt to
find a balance between facilitating entrepreneurial activity and protecting the investor (creditor).
The ambition of the courts is often reviewed by legislation.
The Commonwealth Law Economic Reform Program first instigated in 1996, sought a series of
economic development reforms informed by a conservative notion of high standards for Directors
in their duties to care, skill and diligence to provide a basis for sound decision making and
facilitat-ing entrepreneurial risk takfacilitat-ing. This was contracted in the light of soci-economic influence of the
time.
Seminal to that notion was the business judgement rule of s 180 (2) (3) of the Corporations Law
2001 (Cth), The rule is said to offer directors and officers a safehar our from personal liability
judgments.24 The requirements of s 180 (2) must be made out and established and if so it will
protect officers who have a ted on an informed basis without material personal interest and who
have a rational belief that the decision is in the best interests of the corporation.25
In application, the courts have preferred a pattern of conservative application of the general law
principals. Upon the development of the safe har our construction of s 180 (2) (3) in March
1998, after AWA Ltd v Daniels (1992) 10 ACLC 933, Kirby J described the legislation as Corporate
anxiety,26 he elaborated, The challenge before lawmakers is to establish a regime which will
pro-vide these checks and uphold such standards without unduly reducing the capacity of the
compa-ny and its officers to perform the economic functions for which the corporation was established.
We are talking of a delicate balance. In Australia, the point at which that balance is struck cannot
ignore the recent examples of corporate failures which also evidenced the failures of the legal
sys-tem and of the independent directors who should have vigilantly protected shareholders, their
companies and the public from the devastating losses which occurred.27 The courts seem to lean
towards the tightening of obligations of the duty albeit most recently there has been signs of
cracks.
AWA Ltd v Daniels (1992) 10 ACLC 933 is a seminal case. It held an auditor and company directors
had failed to lead a Corporation to the requisite standard of care when they did not act upon
in-formation regarding the state of the company in an accountable and transparent fashion. The
pviously held notion that liability of directors was limited to cases of gross negligence was
24
Greenhow, Annette, "The Statutory Business Judgment Rule: Putting the Wind into Directors' Sails" [1999] BondLawRw 3; (1999) 11(1) Bond Law Review 33.
25 Ibid. 26
The Hon Justice Michael Kirby AC CMG, “The Company Director: Past, Present and Future,” The Aus-tralian Institute of company directors Tasmanian Division Luncheon Address, Hobart, Tasmania, 31 March 298 at 20.
je ted, Kirby J.28 This applied to non executive directors. This tone of a high standard was later
ratified in Vines v Australian Securities & Investments Commission29.
There has since been many cases reaffirming the high standard. The Centro Case,” Australian
Se-curities and Investments Commission v Healey [2011] FCA 717, made out breaches of s 180 of the
Corporation Law Act 2001 (Cth) and considered the failure of directors and the chief financial
of-ficer to accurate, compliant not misleading statements to market. The case brought forward by
ASIC handed down civil a penalties to the directors and de o strates the necessity for directors
to have sufficient financial literacy to be able to form an opinion that the financial report of the
company accurately presents the financial position of the company.30 ASIC has stated it believes
the Centro decision provides important guidance and direction on corporate accountability of
di-rectors and management31. Middleton J recognised that the standard of assessment for non
ex-ecutive directors is not wholly objective and that it must be balanced with the expectations of the
public and the market as to adequate display of skill in the role. ASIC did not argue that the officer
must know everything of the company but must have the requisite level of skill for a director to
assure good governance of the company.
Daniels v Anderson32 is determinative as to the elements of directors diligence. The director can
delegate the function of operations but not the obligation of the standard of care.
There has been a recent flag to give rise to the perception that the High Court maybe rebalancing
or rebalancing the degree of standard of care. Forrest v ASIC; Fortesque v ASIC [2012] HCA39 the
High Court made a determination in favour of the directors on technical matters based in good
28
ibid at 16. 29
Vines v Australian Securities & Investments Commission (2007) 62 ACSR 1. 30
Belinda Gibson and Diane Brown, “ASIC’S expectations of Directors,” 35(1) UNSW Law Journal 254. 31
11-188MR Centro civil penalty proceedings; http://asic.gov.au/about-asic/media-centre/find-a-media-release/2011-releases/11-188mr-centro-civil-penalty-proceedings/.
32
decision making in the ordinary course of business. It was an interesting swing back towards the
subjective element, the nature of the actions, in the objective test33. More recently in
Woodcroft-Brown v Timbercorp Securities Limited and Ors [2014] HCATrans 85 (11 April 2014) the High Court
took a wider step toward liberalisation of the standard of the directors actions as to the standard
of care. Whilst this case did not directly consider directors duties to care, skill and diligence
specif-ically but it enlightened on requisite standards for directors duties. Considering directors
obliga-tions in prospectus disclosure under Corporations Act s 1013C, sig ifi a t risks, in disallowing
appeal, the High Court is showed that critically considers the circumstances around the failings of
corporations prior to focussing fault on company directors.
The lessons from this discussion is the in the Australian context the law governing directors duties
in good governance is an interplay between legislation and judicial review under the construction
of responsible government. There is a formulated notion of requisite responsibility and the
inter-pretative discussion is made objectively. Fiduciary duties are supplemented with codified law
as-signed to provide surety of interpretation and jurisdictional harmonisation. Regulation is
objec-tively managed and supplemented by model litigant that is proactive in guidance.
3.2 The Indonesian perspective
The principles of good corporate governance principles (GCG) actually has already stipulated under
both Company and Investment Indonesian although it not directly mentioned as GCG. The Law No.
40 of 2007 regulate the national treatment, transparency, accountability as well as fairness under
Article 44 (2), 50 (2), 53(2), 97(4) 101(1), 116 , 108 (1) 114(4), and 152(1). For banking sectoral
GCG clearly stipulated such through PBI No. 8/14/PBI/2006 (The Central Bank of Indonesia No.
8/14/PBI/2006).
33
To encourage better GCG in investment sector in Indonesia between Indonesia and OECD has
concluded a partnership framework (framework of Co-operation Agreement). Under “
Indonesia-OECD Policy dialogue on Corporate Governance” that clearly stipulated 6 main GCG principles
for investment sector namely: Ensuring the Basis for an Effective Corporate Governance
Frame-work, The rights of Shareholders and Key Ownership Function, The Equitable Treatment of
Share-holders, The role of stakeholders in Corporate Governance, Disclosure and Transparency, The
Re-sponsibilities of Board.34
IV. Conclusion
Lessons for decision makers of Foreign direct investment into Indonesia
4.1. Indonesian understands that to meet objectively economic goals its must attract foreign direct
investment. It has political will and a great ambition for the prosperity of its people. In that notion
Indonesia is as developing economy is open.
Indonesia is a young sovereignty hitting a myriad of ancient cultures. The country only officially
having independence recognised in 1949. The legal construction of Foreign Direct Investment may
seek comfort of construction in International law however the practical application means a sound
understanding of the cultural, historic, geographic and demographic concerns of the Indonesian
counter party and Indonesian institutions, the application of these notions in domestic law, is an
im-perative that cannot be overlooked in prudent investment decision making.
34
A Foreign investment decision maker who makes a unilateral assertion that construction and capital
surety is merely protected by international harmonisation of law by way of contract, is likely to
dis-cover that such assumption is founded on unsound ground. It is likely that local Indonesian law will
frustrate this assertion.
Thus, in the Indonesian context, the hard edge of contract law, while more than evidentiary,
re-quires to be supplemented by practical business diplomacy. Harmonisation of law pertaining to
in-vestment is muted in the efficiency and it is very difficult to obtain final adjudication in any other
context than Indonesian law. The community construction and the interplay of it‟s vertically
sophis-ticated politics with law combined with the adjudicated nuisances of local or regional matters,
re-quires a prudent investment decision maker to turn their mind to Indonesian good governance. This
is so because the likely outcome of foreign direct investment is foreign investors or their
representa-tives will act as directors in the Indonesian jurisdiction. Alternatively, it is incumbent on the
pru-dent investment decision maker to factor these intricacies. Directors of Indonesian companies, in
adherence to fulfilling their duties, are wise to understand the nuances of the process of law and
adjudication in Indonesia. An adversarial, ring fencing approach to the construction of operations
in the light of Indonesian law will fail due to a failure to understand the intricacies of the political
reality and customary responsibilities of its custodians. Based in fiduciary duty by statute, the
inter-pretative measures of directors duties and their obligation to Indonesia, must be equally addressed
along with the commercial profit seeking operatives, in the mind of the director.
Indonesian law is concerned with protecting the rights of directors and in the context of good
go-vernance. It is surround by objective process and clear directorial determination. It is in the
adjudi-cation process that matters defer from the Australian experience. The debate is much for parochial
of the regional experience and custom and thus determination can display sporadic outliers in
ground, advocacy and engagement with the construction of Indonesian Law of good governance as
reflected by directors duties, will provide a more sound outcome for the surety of capital over
obsti-nate or worse still belligerent assertion that holding the contract to intention determination in
adju-dication is enough.
V. Recommendation
5.1 The foreign direct investment decision maker should ensure that the Director‟s representing the
construction of the associate capital undertake a deep engagement and understanding of the regional
and cultural custom and it‟s local interplay with Indonesian law as an initial function of the
invest-ment and maintain that function as a critical operation of director duties over the term of the
in-vestment. At a minimum, the environment, social, political and local economic context should be
assessed and where appropriate engaed. The reason for this is 3 fold;
1) the practical element of investment most likely requires an administrative construction that will
impose Indonesian corporate law obligations including directors duties on representative of the
investor the ramifications of which cannot be completely understood by the Director without
such an understanding;
2) contracts and or treaties nominating international adjudication will almost certainly require
rati-fication by Indonesian law to gain effect in Indonesia, experience has proven this a difficult
as-signment;
3) In Indonesia, this process is a function of good corporate citizenship. An understanding these
laws the recommended context will inform and allow for prudent decision making that may
protect the surety of capital by offering an ability to swiftly take action of matters of concern. In
turn this will provide a greater basis for successful dispute resolution as foundations have been
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