Liabilities
6.3 Independence
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6.3 Independence
International best practice classifies different categories of commissioners according to their degree of involvement in a company’s corporate affairs.
In Indonesia, the ICL provides that commissioners fall within two main
categories: independent commissioners (komisaris independen) and delegated or representative commissioners (komisaris utusan).133 Independent commissioners must have no affiliation to the company. Delegated commissioners, on the other hand, may include shareholders and/or individuals who are affiliated with members of the BoC or BoD. An independent commissioner shall be appointed by a GMS resolution from among the parties not affiliated with the ultimate shareholders and other BoC and/or BoD members. The BoC nominates delegated commissioners by way of a BoC resolution.134
Many Indonesian public companies are controlled by a single majority
shareholder, or a group of shareholders, that is well informed of the company’s affairs. The remaining ownership is often widely dispersed. Many of these minority shareholders lack the resources and information to effectively monitor management or defend themselves against potential abuse by the majority.
In these types of companies, independent commissioners play an especially vital role. Independent commissioners should make up at least 30 percent of the BoC of a listed company in Indonesia.135 Indonesia’s CG Code provides that the number of independent commissioners should ensure that the control mechanism runs effectively and in accordance with laws and regulations.
Best Practice
Most international and national codes of corporate governance recommend that the supervisory board be primarily composed of members who are independent of the company, and who contribute:
• An impartial perspective in their judgments
133 ICL, Article 120.
134 ICL, Article 120.
135 IDX Listing Rules, Attachment I, Article III.1.4.2; OJK Regulation No. 33/POJK.04/2014 on Directors and Board of Commissioners of Issuing Companies or Public Companies, Article 20.
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• Knowledge and experience outside of the company
• Useful contacts
In most European Union countries, commissioners normally exercise oversight of the company’s financial and strategic decision-making bodies. They play an important role in ensuring the unbiased monitoring of:
• Nomination of directors to the BoD
• Directors’ remuneration, including the president director
• Internal and external audits
In the U.K., the Higgs report categorized the role of commissioners around four issues:
1. Strategy: Commissioners should constructively challenge and contribute to the development of the company’s strategy.
2. Performance: Commissioners should scrutinize the
performance of management in meeting agreed upon goals and objectives and monitor the reporting of the company’s performance.
3. Risk: Commissioners should satisfy themselves that
financial information is accurate and that financial controls and risk management systems are robust and defensible.
4. People: Commissioners are responsible for determining appropriate levels of remuneration for directors, have a primary role in appointing, and where necessary removing, the president director, and in succession planning.
International best practice suggests an independent commissioner ought to be an individual who has no direct connection to the company, and should not receive any substantial financial or other benefits. He or she should:
• Have never been an employee of the company, or a shareholder owning more than 10 percent of the company’s shares
• Have not paid or received from the company a substantial amount,
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or been a major shareholder of a company that has paid or received from the company a substantial amount (the threshold of such amount should be determined by the GMS and set out in the AoA of the company)
OJK places further restrictions on the eligibility of independent commissioners for publicly listed companies and issuers. An independent commissioner must:136
• Have not worked or held responsibilities for planning, directing, controlling, or supervising the activities of the company for six months prior to being engaged as an independent commissioner, unless that individual is being re-appointed to the position of independent commissioner for a new term
• Not hold any shares either directly or indirectly in the company
• Not have any affiliation with the company, BoC or BoD members, or majority shareholders
• Not have any business relationship, either directly or indirectly related to the business activities of the company
Independent commissioners can make a substantial contribution to important company decisions, especially in evaluating executive performance, setting appropriate remuneration for executives and commissioners, reviewing financial statements, and resolving corporate conflicts. Independent commissioners provide investors with additional assurance that the BoC’s deliberations will be free of obvious bias. Companies are advised to disclose information about independent commissioners in their annual report.
136 OJK Regulation No. 33/POJK.04/2014, Article 21(2).
Best Practice
According to the IFC’s definition of independence, an independent commissioner is a commissioner who has no direct or indirect material relationship to the company other than his/her membership on the board, and who:
1. Is not, and has not been in the past five years, employed by the company or its affiliates
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2. Does not have, and has not had in the past five years, a business relationship with the company or its affiliates (either directly or as a partner or shareholder, and is not a director, officer or senior employee of a person that has or had such a relationship)
3. Is not affiliated with any non-profit organization that receives significant funding from the company or its affiliates
4. Does not receive and has not received in the past five years, any additional remuneration from the company or its affiliates other than his or her
commissioner’s fee and such fee does not constitute a significant portion of his or her annual income 5. Does not participate in any share option or pension
scheme/plan of the company or any of its affiliates 6. Is not employed as an executive officer of another company where any of the company’s executives serve on that company’s board
7. Is not, nor has been at any time during the past five years, affiliated with or employed by a present or former auditor of the company or any of its affiliates 8. Does not hold a material interest137 in the company
or its affiliates (either directly or as a partner, shareholder, director, officer, or senior employee of a person that holds such an interest)
9. Is not a member of the immediate family (and is not the executor, administrator, or personal representative of any such person who is deceased or legally incompetent) of any individual who would not meet any of the tests set out in (1) to (8) (were he or she a commissioner/director of the company) 10. Is identified in the annual report of the company
distributed to the shareholders of the company as an independent commissioner
137 For the purpose of this definition, "material interest" shall mean a direct or indirect ownership of voting shares representing at least 5 percent of the outstanding voting power or equity of the company or any of its affiliates.
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11. Has not served on the board for more than ten years.
The considerable number of these definitions with their detailed qualifications may give rise to confusion. However, understanding and defining independence is not complex. The Council of Institutional Investors, a grouping of some of the world’s largest institutional investors, defines independence as follows:
“Stated most simply, an independent director138 is a person whose directorship constitutes his or her only connection to the corporation.”139 For those interested in learning how to apply this simple definition in practice, the Council of Institutional Investors also lists specific circumstances that compromise independence.
138 In this context, “director” is a reference to a member of the board of directors in a unitary system, which is the equivalent of a commissioner in Indonesia’s two-tier board structure.
139 Council of Institutional Investors, Policies on Corporate Governance, https://www.cii.org/corp_gov_policies#indep_director.