Authority
D. The Structure and Committees of the Board of Commissioners
2. Committees Established by a Board of Commissioners
30 Indonesia’s CG Code Part IV C. 3.7 31 ICL, Article 121
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Board of Commissioners. Both the CG Code and the ICL suggest that the Board of Commissioners may form committees in order to assist it in its activities.
The types of committees suggested by the CG Code include Audit Committee, Nomination and Remuneration Committee, Risk Policy Committee and Corporate Governance Committee. The CG Code also allows companies to set up other committees according to resolutions of the GMS.
For publicly listed companies, state-owned enterprises, province and region-owned companies, companies that raise and manage public funds, companies of which products or services are widely used by public, and companies with extensive influence on environment, an Audit Committee shall be established, whereas other committees are formed as required.32
It should be noted that a large number of committees can be hard to manage and may lead to a fragmentation of the Board of Commissioners. It is advisable to establish committees as the need arises, starting with the most critical ones, and then establishing others as experience is gained. The Board of Commissioners may establish either permanent or ad-hoc Board committees. The most important committee from the shareholder perspective is the Audit Committee. Some of the committees that a company should consider establishing are described in Table 4.
32 CG Code Part IV 3.7
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Table 4. Different Types of Committees Proposed Functions
Audit Committee35
Recommendations for the Committee’s Composition
• To assist the Board of Commissioners in determining the selection criteria for candidates of the member of the Board of Commissioners and the Board of Directors as well as the remuneration system;
• To assist the Board of Commissioners in preparing for the candidates of the members of the Board of Commissioners and the Board of Directors and proposing the amount of their remuneration. The Board of Commissioners may propose the candidates and their remuneration for approval by GMS in accordance with the articles of association;
• The existence of the Nomination and Remuneration Committee and its work system shall be reported to the GMS.
• Shall function to assist the Board of Commissioners to ensure that:
(i) financial reports are presented appropriately in accordance with the generally accepted accounting principles; (ii) internal control structure is adequate and effective, (iii) internal and external audits are conducted in accordance with applicable audit standards, and (iv) audit findings are followed up by the management;
• The Audit Committee shall review candidates for external auditors including their remuneration, and submits its recommendation to the Board of Commissioners.36
The majority of the Nomination and Remuneration Committee members should be independent commissioners. One of them should be appointed as Chairman of the Committee.
The Nomination and Remuneration Committee members need to be knowledgeable about the basic principles of business ethics, management, ICL, Manpower Act and other applicable regulations. For publicly listed companies, state-owned enterprises, province and region owned companies, companies that raise and manage public funds, companies of which products or services are widely used by public, and companies with extensive influence on environment, the Nomination and Remuneration Committee is chaired by an Independent Commissioner, whilst the other members may consist of a Commissioner and or professionals from outside of the company.
The composition of the Audit Committee shall be such so that it can accommodate with the complexity of the company by taking into account the effectiveness in decision making.
For publicly listed companies, state-owned enterprises, province and region-owned companies, companies that raise and manage public funds, companies of which products or services are widely used by public, and companies with extensive influence on environment, the Audit Committee is chaired by an Independent Commissioner and the members may consist of Commissioners and or professionals from outside the company. One of the members should have an accounting and or finance background.37
33 CG Code Part IV 4.2 34 CG Regulations, Article 15.1 35 CG Regulations, Article 15.1 36 CG Code Part IV 4.1.a. and 4.1.b 37 CG Code Part IV 4.1.c
Nomination and remuneration Committee33,34
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Table 4. Different Types of Committees (Cont’d) Proposed Functions
Risk Policy Committee38,39Corporate Governance Committee40
Recommendations for the Committee’s Composition
• Shall function to assist the Board of Commissioners in reviewing the risk management system established by the Board of Directors and evaluating the company’s risk tolerance.
• Shall function to assist the Board of Commissioners in reviewing the GCG policies prepared by the Board of Directors and monitoring the effectiveness of the GCG practices, including aspects related to the business ethics and social responsibility of the company.
Members of the Committee need experience in the industry in which the company is active.
The Committee will likely benefit from members with other areas of expertise such as finance and operations.
Members of the Risk Policy Committee consists of members of the Board of Commissioners, but, if necessary, professionals from outside of the company may be appointed.
Members of the Committee must be of the highest integrity, enjoy the trust of all shareholders, and be knowledgeable on legal and ethical standards.
Members of the Corporate Governance Committee shall consist of the members of the Board of Commissioners, but, if necessary, professionals from outside of the company may be appointed.
If deemed necessary, the Corporate Governance Committee may be combined with the Nomination and Remuneration Committee.
38 CG Code Part IV.4.3 39 CG Regulations, Article 15.1 40 CG Code Part IV 4.4
b. Authority of Board of Commissioners Committees The Board of Commissioners is a collective body in which:
• All members have equal rights and duties All members bear joint and several liability
• Members act together as a body according to specific decision-making procedures.
Although the above suggests that the ultimate decision-making responsibility rests with the entire Board of Commissioners, Board of Commissioners committees can resolve and make decisions on issues delegated to them by the Board of
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Commissioners, provided that resolutions of a committee are only valid and enforceable if a majority of members of such committee who are present and vote at the meeting of the committee are also members of the Board of Commissioners.
c. The Composition of Board of Commissioners Committees
The number of members on a Board of Commissioners committee is determined by the Board of Commissioners. In every committee, at least one member should be a member of the Board of Commissioners and at least one member should fulfill all the conditions for an independent commissioner. The Board of Commissioners should appoint one member as Chairman of each committee.
Other parties, most notably managers, who are not members of the Board of Commissioners committee, may be invited to present or elaborate on particular issues, but have observer status only, i.e., are precluded from conferring or deciding on particular issues.
Best Practices
Experienced and knowledgeable commissioners should staff Board of Commissioners committees. There needs to be a sufficient number of members to accomplish the work at hand. Since the work of Board of Commissioners committees may involve time-consuming reviews, the
participation of commissioner in multiple Board of Commissioners committees should be restricted. Before allowing participation in multiple committees, Board of Commissioners should review all the activities assigned to the committee, estimate time necessary for effective realization of these activities, as well as free time potential members can dedicate to the work of the committee. Board of Commissioners committees may occasionally require the assistance of outside advisors. However, these advisors must not receive Board of Commissioners committee member status.
Many stock exchanges further recommend that Board of Commissioners committees be composed of and/or chaired by independent commissioners.
The listing requirements of some stock exchanges, for example the New York Stock Exchange, go further and require a majority of independent commissioners, as well as the Audit and Human Resources Committees to be composed solely of independent commissioners.
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The Chairman of a committee is responsible for its effectiveness, regardless of his/her other duties.