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3.3 Indonesia’s Code of Good Corporate Governance
Corporate governance codes serve as important resources in both advanced and transitional economies. Indonesia’s framework for corporate governance has developed through several stages and is reasonably comprehensive, albeit non- binding.
A specialized body, the National Committee on Corporate Governance, developed Indonesia’s first CG Code in 1999. Due to concern that the public sector should also comply with these governance principles, the Government of Indonesia later replaced the National Committee on Corporate Governance with the National Committee on Governance, consisting of a public sub- committee and a corporate sub-committee.25
Indonesia’s CG Code has been revised several times, most recently in 2006.
As already noted, it is not legally binding, but serves as an ethics-based model that provides a reference for the successful implementation of CG practices.
The CG Code describes steps that can be taken by companies to create checks and balances over their governance and management, to enforce transparency and accountability, and to promote corporate social responsibility for their long-term sustainability. Updated regularly, the CG Code is a living instrument that sets standards and offers guidance as to how companies may implement corporate governance to:26
• Achieve sustainable growth through a management system based on transparency, accountability, responsibility, independence, and fairness
• Empower the functions and independence of each company organ, namely, the BoC, the BoD, and the GMS
• Encourage shareholders, members of the BoC, and members of the BoD to make responsible decisions that comply with laws and regulations
• Stimulate the company’s awareness of social responsibilities, in particular the environmental and societal interests of local communities
25 Decree of the Coordinating Minister for Economic Affairs No. KEP/49/M.EKON/11/2004, as amended by Decree of the Coordinating Minister for Economic Affairs No. 117 of 2016.
26Indonesia’s Code of Good Corporate Governance, 2.
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• Take shareholders’ and other stakeholders’ interests into account
• Enhance the national and/or international competitiveness of a company in order to enhance market confidence which may promote investment flow and a sustainable national economic growth
The CG Code applies to all companies in Indonesia, including Sharia-compliant companies. However, publicly listed companies, state-owned enterprises, provincial and regional-owned companies, companies that raise and manage public funds, companies that produce goods or services for public consumption, and companies that have a significant impact on the environment may be expected to implement the CG Code more thoroughly. Regulators and policy makers should use the CG Code as a reference for developing laws and applicable sanctions.
The CG Code provides a minimum standard for the implementation of good corporate governance, which companies may adapt in response to their particular characteristics. The National Committee on Governance also issues specific and more detailed governance codes that apply to specific industries/
sectors.
Indonesian companies are encouraged to develop their own corporate
governance codes using the CG Code as a reference, and which should cover at least the following:
• Procedures for convening and voting at shareholder meetings
• Procedures for nominating, electing, and dismissing commissioners and directors
• Procedures for board meetings
• Procedures governing the relationship and coordination between the BoC and the BoD
• Procedures to evaluate the performance of the BoC and the BoD In 2014, OJK launched significant reforms under a corporate governance roadmap (Tata Kelola Perusahaan Indonesia)27 designed to raise corporate governance standards of Indonesian companies, improve investor protection, and strengthen the business environment. This initiative is aligned with Indonesia’s preparations as an ASEAN member state towards setting up the
27 Indonesia Corporate Governance Roadmap: Towards Better Governance of Issuers and Public Companies, (Jakarta: Otoritas Jasa Keuangan, 2014), http://www.ifc.org/wps/wcm/connect/
a476310042e2a54bbc09fc384c61d9f7/Indonesia+CG+Roadmap.pdf?MOD=AJPERES.
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ASEAN Economic Community.
As part of the roadmap, OJK issued Regulation No. 21/POJK.04/2015 and Circular Letter No. 32/SEOJK.04/2015 on Implementation of Corporate Governance Guidelines for Public Companies ("OJK CG Guidelines"). Prior to 2015, Indonesia encouraged but did not mandate companies to implement corporate governance standards, and its 2006 CG Code was not legally binding.
The OJK CG Guidelines implemented a “comply or explain” approach, and introduced key changes to strengthen issuers and public companies’ obligations with respect to shareholder protections, the function and roles of the BoC and BoD, communication with stakeholders, and information disclosure.
The following are key elements of the OJK CG Guidelines that apply to issuers and public companies:28
1. Protection of Shareholder Rights
a) Companies should establish technical voting procedures for either open (show of hands) or closed (electronic/voting card) voting that protects shareholders’ autonomy.
b) All members of the BoC and BoD should be present at the annual general meeting of shareholders (AGMS) and respond to all shareholder questions.
c) Companies should publish summaries of the AGMS minutes in both Bahasa Indonesia and English on their website within two days of the meeting. These summaries should be available for at least one year.
2. Function of the BoC and BoD
a) Size and Composition of the BoC and BoD
Companies should disclose that they have considered the complexity of their business activities and corporate objectives when determining the size of their BoC and BoD, which should be sufficient to support their activities but not so large as to hinder decision making. This disclosure should also show that companies have taken into account
28 Circular Letter of OJK No. 32/SEOJK.04/2015 on Implementation of Corporate Governance Guidelines for Public Companies
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the scope of skills, knowledge, and experience that will be required for the BoC and BoD to function effectively. In particular, companies should ensure the director responsible for the company’s accounting and finance has knowledge or expertise in these areas.
b) Self-Assessment Policy
Companies should implement a self-assessment policy that requires BoC and BoD members to evaluate their collective performance, promoting accountability and transparency through regular assessments. Companies should disclose this policy in the annual report.
c) Financial Crimes
The BoC and BoD should implement a policy that requires members to resign if found to have been involved in a financial crime.
d) Succession
The BoC, or its nomination and remuneration committee if it has one, should establish a clear policy for the succession of BoD members and other company managers to support long-term business sustainability.
3. Stakeholder Communication and Participation a) Communication
Companies should develop a policy for ensuring strong, regular, two-way communication with shareholders/
investors, and publish this policy on their website.
b) Insider Trading
Companies should establish a comprehensive policy to prevent insider trading (the misuse or disclosure of sensitive company information that is not available to the public).
The policy should define insider trading clearly, set out the duties of BoC and BoD members, and establish protocols for reporting breaches.
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c) Anti-Corruption and Anti-Fraud
Companies should implement an anti-corruption and anti- fraud policy, including strategies for prevention.
d) Supply Chains
Companies should implement procedures for the selection of suppliers, covering identification of critical suppliers, selection criteria and a transparent procurement mechanism, contingencies for loss of important suppliers, and protection of supplier rights.
e) Whistleblowing
Companies should develop a whistleblowing policy that sets out reporting mechanisms, defines violations, establishes whistleblower protections and confidentiality guarantees, and handling and follow up of complaints.
4. Information Disclosure
a) Companies should use a broad range of information technology, beyond the company’s own website, to ensure transparency.
b) Companies should disclose the beneficiaries of all
shareholdings greater than 5 percent, as well as beneficial ownership of shares by majority and controlling
shareholders.
If a company complies with the OJK CG Guidelines in all aspects, then it should provide a statement in the annual report to that effect, specifically naming Regulation No. 21/POJK.04/2015 and Circular Letter No. 32/SEOJK.04/2015.
Typically, companies make corporate governance disclosures in a separate statement through the annual report (and provided on the website), which may be in the form of a tabular chart addressing each principle and recommendation individually, stating how the company complied with the provisions in the OJK CG Guidelines over the past year.
Where a company’s circumstances are such that it is unable to implement requirements under the OJK CG Guidelines, OJK requires companies to explain their reason for non-compliance and to set out an alternative strategy toward
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implementing the guidelines.29 Ideally, these explanations should:
• Address the manner in which the company has departed from OJK recommendations. The explanation should be convincing, understandable, company-specific, and provide some context as to why the company has decided to depart from the recommendations.
• Fully describe the departure and specify deviations from OJK provisions as well as from overarching best practice corporate governance principles.
• Describe mitigating actions taken to address risk arising from the company’s decision not to comply with the recommendations.
• The deviation from recommendations should be time-bound (i.e., only expected for a limited period) and the company’s explanation states when it intends to come into compliance.
• Elaborate how the company’s alternative measures/solutions achieve the underlying objectives of the OJK CG Guidelines that the company cannot implement in full, and otherwise contributes to the objective of good governance.
• Companies should be specific when giving their reasons, avoiding responses that are vague, general, or formulaic and repeated year after year. The explanation should be carefully articulated, clear, accurate, and comprehensive—merely identifying an area of non- compliance is insufficient. Fundamental disagreement with the OJK CG Guidelines is not an adequate reason for non-compliance.
Companies should indicate when they expect to be able to comply, and be prepared to engage in a dialogue with regulators and shareholders upon request.
29 OJK Regulation No. 21/POJK.04/2015 on Implementation of Corporate Governance Guidelines for Public Companies, Article 2.
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