People

Authority

C. The Composition of the Board of Commissioners

4. People

Commissioners are responsible for determining appropriate levels of remuneration for Directors, have a prime role in appointing, and where necessary removing, President Director, and in succession planning.

25 Derek Higgs, Review of the role and effectiveness of non-executive directors, January 2003. See also:

http://www.ecgi.org/codes/documents/higgsreport.pdf./

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Independent Commissioners

International practices distinguishes between independent commissioners and non- independent commissioners. Good corporate governance practice suggests that, an independent commissioner is an individual who has not received substantial financial or other benefits from such company in the last three years, such as:

• have not been an employee of the company or a shareholder of 10% or more of the company

• have not paid to or received from the company a substantial amount, or been a major shareholder of a company that has paid to 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)

• have not been an External Auditor of the company.

For more information on related persons, see Chapter 4, Section C.2.

Best Practices

Commissioners who are independent can make a substantial contribution to important decisions of the company, especially in evaluating executive performance, setting executive and commissioner remuneration, reviewing financial statements, and in resolving corporate conflicts. Independent commissioners give investors additional confidence that the Board of Commissioners’ deliberations will be free of obvious bias. Companies are advised to disclose information about independent commissioners in the annual report.

IFC defines “Independent Commissioner” as a Commissioner who:

1. Has not been employed by the Company or its Related Parties in the past five years.

2. Is not, and is not affiliated with a company that is an advisor or consultant to the Company or its Related Parties.

3. Is not affiliated with a significant customer or supplier of the Company or its Related Parties.

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4. Has no personal service contracts with the Company, its Related Parties, or its senior management

5. Is not affiliated with a non-profit organization that receives significant funding from the Company or its Related Parties.

6. Is not employed as an Director of another company where any of the Company’s Directors serve on that company’s Board of Directors.

7. Is not a member of the immediate family of an individual who is, or has been during the past five years, employed by the Company or its Related Parties as a Director.

8. Is not, nor in the past five years has been, affiliated with or employed by a present or former auditor of the Company or of a Related Party.

9. Is not a controlling person of the Company (or member of a group of individuals and/or entities that collectively exercise effective control over the Company) or such person’s brother, sister, parent, grandparent, child, cousin, aunt, uncle, nephew or niece or a spouse, widow, in-law, heir, legatee and successor of any of the foregoing (or any trust or similar arrangement of which any such persons or a combination thereof are the sole beneficiaries) or the executor, administrator or personal representative of any Person described in this sub-paragraph who is deceased or legally incompetent.

(For the purposes of this definition, a person shall be deemed to be “affiliated”

with a party if such person (i) has a direct or indirect ownership interest in;

or (ii) is employed by such party; “Related Party” shall mean, with respect to the Company, any person or entity that controls, is controlled by or is under common control with the Company).

Commissioner should be disqualified from being independent if they answer

“Yes” to one or more of the following questions in Table 3:

Table 3. Are Commissioners on Your Board of Commissioners Independent?

Yes No

Is the Commissioner an employee of the company? Has the Commissioner been an employee of the company over the last five years?

Has the Commissioner been a member of the Board of Commissioners or the Board of Directors of the company, except as an independent Commissioner?

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Table 3. Are Commissioners on Your Board of Commissioners Independent? (Cont’d)

Yes No

Has the Commissioner paid to or received from the company a substantial amount apart from a fee received as Commissioner?²⁶

Has the Commissioner been, directly or indirectly, a shareholder of more than 10% of the company or an associated company (including affiliated person) of the company? Has the Commissioner been a member of the Board of Commissioners or Board of Directors of such a shareholder?

Has the Commissioner had within the last three years a significant business relationship with the company or a related person or the company? Has the Commissioner been in the same period a shareholder, partner, External Auditor, commissioner, member of the Board of Commissioners or the board of Directors of the entity that had a significant business relationship with the company?

Has the Commissioner been a member of the Board of Director of another company in which an director of the company is a member of the Board of Directors?

Is the Commissioner a representative of the significant shareholder?

Has the Commissioner served as a member of the Board of Commissioners at least six terms in a row, even if he/she was an independent member?

Is the Commissioner in any of the above-mentioned relationships with an associated company, controlling shareholders of the associated company, Commissioner or members of the Board of Commissioners or Board of Directors of the associated company?

If a Commissioner ceases to be independent, the Commissioner should immediately notify the Board of Commissioners with an explanation of why the criteria of independence no longer apply. The Board of Commissioners is then advised to:

• Notify shareholders that the Commissioner is no longer independent

• Disclose information about independent Commissioner in the annual report of the company, giving shareholders the opportunity to verify any changes in the status of Independent Commissioner.

In any event, Independent Commissioner should refrain from actions that may compromise their independent status.

Other international and national codes of corporate governance have similar definitions for Independent Commissioner. In the U.K. for example, a Commissioner is considered independent when the Board of Commissioners

26 The threshold of such amount should be determined by the GMS and set out in the charter of the company.

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determines that the Commissioner is independent in character and judgment, and there are no relationships or circumstances which could affect, or appear to affect, the Commissioner’s judgment. Such relationships and circumstances would include those, in which the Commissioner:²⁷

• Is a former employee of the company or group, and his/her employment (or any other material connection) has ended less than five years ago.

• Has, or has had, within the last three years, a material business relationship with the company either directly, or as a partner,

shareholder, Commissioner, or senior employee of a body that has had such a relationship with the company.

• Has received or receives additional remuneration from the company apart from a Commissioner’s fee, participates in the company’s share option or a performance related pay scheme, or is a member of the company’s pension scheme

• Has close family ties with any of the company’s advisers, Commissioner or senior employees

• Holds cross-directorships or has significant links with other Commissioners through involvement in other companies or bodies

• Represents a significant shareholder

• Has served on the Board of Commissioners for more than 10 years.

The large number of definitions with their detailed qualifications may give rise to confusion. In reality, understanding and defining independence need not be complex. The Council of Institutional Investors (CII), a grouping of some of the world’s largest institutional investors, defines an Independent Commissioner plainly in the following way: “Stated most simply, an Independent

Commissioner is a person whose commissionership constitutes his/her only connection to the corporation.” This cuts to the heart of the matter. For those interested in learning how to apply this simple definition in practice, the CII also lists specific circumstances that compromise independence.²⁸

Finally, it should be noted that Commissioner independence is not a panacea.

The New York Stock Exchange is a telling example. In 2003, the exchange was enveloped in a scandal over the excessive compensation of its Chief Executive Officer, despite the fact that compensation levels had been approved by a committee staffed and chaired by Independent Commissioner.

27 The Combined Code on Corporate Governance, July 2003, Section 1, A.3.1. See also: www.fsa.gov.uk/

pubs/ukla/lr_comcode2003.pdf./

28 For more information on the CII (in English), see: http://www.cii.org./

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The Board of Commissioners Structure and Committees

The article 108 ICL regulated that Board of Commissioners shall consist of 1 (one) or more members. In addition, the articles of association of a company usually stipulate that in the event of a Board of Commissioners composed of more than 1 (one) member, one of them should be appointed as the President Commissioner.

Further, Indonesia’s CG Code stated in Part IV C that each of the members of the