Best Practices
D. The Corporate Governance Framework in Indonesia
2. The Legal and Regulatory Framework
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An Introduction To Corporate Governance The Corporate Governance Framework in Indonesia
As mentioned, the first comprehensive piece of legislation for domestic companies was approved in 1968 with the Domestic Investment Law. In 1995, Indonesia established the ICL 1995. In 2007, there are significant changes in legal and regulatory framework for companies and investment in Indonesia where the government issued Investment Law and ICL. Over the past 5 years, Indonesia’s legal and regulatory framework for corporate governance has improved dramatically, but actual implementation and adherence by Indonesian companies to corporate governance practices is still in its improving stages).
Impact of World Trade Organization (WTO) commitments: As a member of WTO, Indonesia has adopted its commitments made when it joined WTO as a positive reference in accelerated its efforts to get its legal framework comply with the WTO requirements.
Application of industry-specific laws and regulation: In Indonesia, companies are required to comply with ICL and other laws and regulations which govern the specific industry and activities carried out by such companies. Thus, a company in the insurance business is subject to ICL and the Law on Insurance Business. Similarly, a bank is subject to ICL and the Law on Banks. In addition to these two laws, a listed bank is also subject to the Law on Capital Market18 and so on.
ICL: As an example, ICL allows (i) the GMS of a limited liability company to elect members of the Board of Commissioners and the Board of Directors, and (ii) the GMS to elect the President Director and President Commissioner respectively.19 However, banking regulations require that the appointment and dismissal of the President Director, the Chairman and members of the Board of Commissioners, and members of the Board of Directors of a limited liability commercial bank be approved by the Governor of Bank of Indonesia (BI).20 Similarly, insurance regulations require that the appointment and dismissal of the President Director, the President Commissioner and the members of the Board of Directors of an insurance company be approved by the OJK.21 This is one of many examples of how there are different legal requirements which are relevant to the corporate governance of a company.
ICL expressly provides that “In special cases where the establishment, organization, management and operation of an enterprise are regulated by a specialized law, the provisions of such law shall prevail”. However, in practice, there are numerous cases where the distinctions are not clear-cut, and the overlapping laws and regulations have created confusion, ambiguities and uncertainties to the companies trying to follow the
18 Law on Capital Market No. 8 of 1995
19 Law on Central Bank (Bank Indonesia) No.3/2004 20 Law on Central Bank (Bank Indonesia) No.3/2004 21 Law on Capital Market No.8 of 1995
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laws and implement good corporate governance practice. These also create the danger of inconsistencies in the implementation of these laws by Ministries, the courts and other law enforcement bodies.
Thus, it is prudent that whilst companies should use this Manual for reference for corporate governance practice, they should also review other laws and regulations which may be applicable to their line of business, and comply with such laws and regulations.
Where it encounters what seems to be some inconsistency or ambiguity of different legislation, a company should try to clarify such an inconsistency or ambiguity, either by engaging the company’s in-house legal department, internal compliance department, advice from the company’s external legal counsel and clarification from law enforcement agencies or law-making agencies, to achieve full compliance with the law and best corporate governance practice.
Applicable laws and legal framework: All commercial enterprises, regardless of their legal form, are subject to a comprehensive set of laws, regulations, and governmental decrees as illustrated in Figure 8. In addition to the general legal and regulatory framework, there are Decrees, Circulars and Decisions from the Government, Ministries and other law enforcement bodies that deal with specific corporate issues in Indonesia in more detail for SOEs, limited liability companies (LLCs) and other corporate entities.
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An Introduction To Corporate Governance The Corporate Governance Framework in Indonesia
Figure 8. Principal Laws and Regulations Impacting on Corporate Governance
Law/Regulation Applicability Comments Law No. 40 of 2007
concerning Limited Liability Company (Indonesian Company Law hereinafter refer to as ICL)
Law No. 25 of 2007 concerning Investment (“Investment Law”)
Law No. 13 of 2003 concerning Manpower (“Manpower Law”)
Law No. 8 of 1995 concerning Capital Market (“Capital Market Law”)
Presidential Regulation No. 36 of 2010 concerning Concerning Lists of Business Fields that are Closed To Investments and Business Fields that are Conditionally Open for Investments (“Negative List”) Head of BKPM Regulation No. 12 of 2009 concerning Procedures and Guidelines of Investment Application (“BKPM Reg.
12/2009”)
All limited liability company activities
All investment activities (domestic and foreign)
Manpower in companies
All listed company activities
Business fields for foreign investment activities
Foreign investment activities
Establishment of limited liability company, capital and shares, company organs (GMS, BOD, BOC), AoA of the company, merger, acquisition, and dissolution, work program, annual report, and use of profit, liquidation, expiry of company.
Form of business entity for investment, treatment of investor, manpower plan, business sector for investment, rights and obligations and liabilities of investor, investment facilities.
Manpower management, rights and obligations of employee, rights and obligations of the company, and all related manpower plan for business activities.
Capital market supervisory board (OJK), stock exchange, clearing and guarantee corporation, central securities depository, investment fund, securities company, securities company representatives, and investment advisors, capital market supporting institutions and professionals, issuers and public companies, public documents and reporting to OJK.
List of business fields that are open and closed for foreign investment.
One stop service of permit application, procedure and mechanism to conduct foreign investment in Indonesia, transfer of foreign shares, fiscal and non fiscal facilities, regional incentives, foreign workers manpower plan (RPTKA), Producer Importer Identification Number (API-P), tax facilities, custom.
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An Introduction To Corporate Governance The Corporate Governance Framework in Indonesia
Figure 8. Principal Laws and Regulations Impacting on Corporate Governance (cont’d)
Law/Regulation Applicability Comments Ministry of Manpower
and Transmigration Decree No. 40 of 2012 concerning Certain Positions that are Prohibited for Foreign Workers (“MMT Reg.
40/2012”) Indonesian Code of Good Corporate Governance 2006 (“GCG Code”)
All related regulations in OJK Capital Market
Company with foreign workers
All company practices
Capital market activities
List of positions in a company that are restricted for foreign workers.
Code of conduct and business ethics, company organs, shareholders, stakeholders, good corporate governance principles, implementation of the good corporate governance.
Capital market supervisory board (OJK), stock exchange, clearing and guarantee corporation, central securities depository, investment fund, securities company, securities company representatives, and investment advisors, capital market supporting institutions and professionals, issuers and public companies, sanctions, public documents and reporting to OJK.
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An Introduction To Corporate Governance The Corporate Governance Framework in Indonesia
As discussed previously in this Chapter, ICL applies to all corporate entities in Indonesia, and in addition to this general rule, companies in the banking, investment, and insurance industries need to comply with specific legislation. The Law on Capital Market and its implementing regulations applies to activities relating to the issuance, offering, sale and purchase of securities, securities-related services and information disclosure by corporate entities, shareholders and investors.
Indonesian companies are also subject to other accounting, anti-corruption, auditing, bankruptcy, commerce, competition, construction, labor, tender process and taxation laws. Where appropriate, this Manual refers to these laws and other legal documents.
The list of legal acts in Figure 8 is far from complete. Moreover, Indonesian legislation continues to change as it develops and improves. For example, as mentioned previously, ICL has amended several times to eliminate inconsistencies in provisions that regulate the activities of governing bodies, securities issuance, the exercise of shareholder rights and other matters. Most of the laws and regulations that have an impact on corporate governance and will be used in this Manual have been enacted in the last few years, although they may have evolved from past laws.
Finally, all Indonesian companies are being encouraged to adhere to the corporate governance rules included in the CG Regulations, although these provisions are only mandatory for listed companies.
Best Practices
Corporate governance frameworks typically comprise elements of legislation, regulation, self-regulatory arrangements, voluntary
commitments and business practices that are the result of country specific circumstances, history and tradition. The desirable mix between legislation, regulation, self-regulation, voluntary standards, etc. in this area will vary from country to country. As new experiences accrue and business circumstances change, the content and structure of this framework needs to be adjusted.22 Companies will need to carefully monitor such adjustments on a regular basis and update their governance systems accordingly.
22 OECD Principles of Corporate Governance, Annotations to the OECD Principles of Corporate Governance, ensuring an effective corporate governance framework. See also: www.oecd.org
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The CG Regulations were adopted by the OJK and draw upon generally accepted principles of corporate governance, including the OECD Principles.
The CG Regulations comprise the following three categories of rules:
1. Legal requirements: The rules that refer to mandatory legal requirements;
these provisions are mandatory not because they are part of the CG Regulations, but because they overwrite or rephrase legal requirements. Legal requirements in the CG Regulations can be recognized by using words ”must”, “is obliged to”,
“cannot”, etc.
2. Comply or explain rules: These rules are to be followed. Listed companies are compelled to disclose and explain all deviations from these rules in the declaration of compliance with the corporate governance principles, comply or explain rules allow companies to deviate from certain rules only when the deviation is justifiable.
The comply or explain rules of the CG Regulations are marked in the text by the use of the word “shall”.
3. Suggestions: These rules are recommendations in their nature. Non-compliance with these rules requires neither disclosure nor explanation. For these rules the CG Regulations use terms such as “should” or “can”.