THE INDONESIA CORPORATE GOVERNANCE MANUAL First Edition IFC Advisory Services in Indonesia In Partnership with: THE INDONESIA CORPORATE GOVERNANCE MANUAL First Edition Jakarta, January 2014 i Disclaimer IFC, a member of the World Bank Group, creates opportunity for people to escape poverty and improve their lives. We foster sustainable economic growth in developing countries by supporting private sector development, mobilizing private capital and providing advisory services. The Indonesia Corporate Governance Manual (CG Manual) was commissioned by IFC as part of the Indonesia Corporate Governance Program that IFC is implementing in Indonesia since 2012. This manual is distributed with the understanding that neither the authors, nor the organizations, countries they represent, nor the publisher are engaged in rendering legal or financial advice. The material in this Manual is set out in good faith for general guidance, and no liability can be accepted for any possible loss or expense in incurred as a result of relying on the information contained herein. This publication is not intended to be exhaustive. It should not be relied upon as a basis for formulating business decisions. On all financial issues and questions, an accountant, auditor, or other financial specialist should be consulted. A lawyer should be consulted on all legal issues and questions. As the laws in the Republic of Indonesia are constantly changing, legal rules referred to herein may be obsolete or superseded by new legislation at the moment of the publication of this Manual. All references to the male gender throughout this Manual apply to both sexes, unless otherwise indicated. The conclusions and judgments contained in this report should not be attributed to, and do not necessarily represent the views of IFC or its Board of Directors or the World Bank or its Executive Directors, or the countries they represent. IFC and the World Bank do not guarantee the accuracy of the data in this publication and accept no responsibility for any consequences of their use. This Manual is distributed subject to the condition that it shall not, by way of trade or otherwise, be lent, sold, hired out, or otherwise circulated on a commercial basis without International Finance Corporation’s prior consent. ii Foreword In today’s globalized environments, companies are facing challenges and competition in global market place. Thus, the role of good corporate governance has become more important. By strengthening the role and the responsibilities of their boards, increasing the amount and quality of disclosure and enhancing accountability of corporate executives, good corporate governance helps companies formalize business and decision making processes and establish the appropriate checks and balances. This, in turn, improves performance and builds trust between businesses and investors, employees, clients and the community as a whole. IFC, a member of the World Bank Group, advocates and promotes good corporate governance practices in any market where it operates by helping its clients and partners address key challenges and achieve impactful results. In Indonesia, IFC set up a Corporate Governance Program in Indonesia in 2012 with the aim of improving market standards and creating an Sarvesh Suri environment conducive to transparent, accountable and IFC, Country Manager, responsible practices. Indonesia As part of this Program, IFC has established a formal cooperation with Otoritas Jasa Keuangan (OJK). A key product of this cooperation between IFC and OJK is the development of this Indonesia Corporate Governance Manual, which serves as a learning instrument to benchmark existing standards and practices in Indonesia with internationally recognized best practices. In this respect, this Corporate Governance Manual should be considered as a major tool for Corporate Governance in Indonesia as it targets a wide spectrum iii of stakeholders, such as directors and commissioners, academics, policymakers, corporate governance experts and more generally, individuals and institutions interested to know about the corporate governance framework in Indonesia. IFC is happy to be part of this initiative with OJK and remains committed to helping raise governance standards across the market and contribute to a sustainable private sector in Indonesia. iv Foreword Indonesia has experienced financial crisis in 1997/1998 in which one of the causes of the crisis is the weak implementation of corporate governance. We have also learnt that recent global financial crisis is due to poor corporate governance practices. Thus, the need for developing and improving corporate governance, in compliance with national regulations and in alignment with international best practices, is unavoidable. Indonesia Financial Services Authority (OJK) is committed to promote corporate governance practices in Indonesia as part of financial stability efforts. Therefore, OJK highly appreciates the initiative of IFC in developing the Indonesia Corporate Governance Manual for companies in Indonesia. OJK believes that the Indonesia Corporate Governance Manual will benefit to all companies in Indonesia in developing their robust corporate governance practices. Through the manual, company could benchmark its current governance implementation with best practices Muliaman D. Hadad and identify the weaknesses that may contribute Chairman of to a company’s financial vulnerability and make the Board of improvement accordingly. The improvement may cover Commissioners of OJK the role of the Board of Commissioners, the role of the Board of Directors, shareholder rights, material corporate transaction, disclosure and transparency, and internal control. As Indonesia will enter the Asian Economic Community, it is inevitable that Indonesian company should improve its corporate governance practices that benchmarked on international best practices to improve v its competitiveness. These will increase investor confidence, reduce the cost of capital, and create sustainable company performance. OJK hopes that the Indonesia Corporate Governance Manual will serve as a cornerstone for the implementation of good corporate governance in Indonesia so as to create conducive, stable and attractive financial sector which contribute to sustainable economic growth. Jakarta, January 2014 vi How to Use this Manual This Manual is divided into 15 chapters: Chapter 1: An Introduction to Corporate Governance Chapter 2: The General Governance Structure of a Company Chapter 3: The Internal Corporate Documents Chapter 4: The Board of Commissioners Chapter 5: The Board of Directors Chapter 6: The Role of the Corporate Secretary Chapter 7: An Introduction to Shareholder Rights Chapter 8: The General Meeting of Shareholders Chapter 9: Corporate Governance Implications of the Charter Capital Chapter 10: Dividens Chapter 11: Corporate Governance Implications of Corporate Securities Chapter 12: Material Corporate Transactions Chapter 13: Information Disclosure Chapter 14: Control and Audit Procedures Chapter 15: Overview of the Corporate Governance Framework of State Owned Enterprises (SOEs) The 15 chapters of the Manual focus on the key corporate governance issues. All issues are closely examined through Indonesian law and regulations and when applicable, interbationally recognized best practices. While it is recommended to read the entire Manual to gain a full understanding of the corporate governance framework in Indonesia, it is not necessary to read all the chapters in chronological order. the reader is encouraged to begin with a topic of interest and follow the links and references included in the text for guidance to other chapters. Examples, illustrations, and checklists are included to make the Manual clear and useful. The following tools will reappear at various intervals in the text: The Chairman’s Checklist The Chairman’s Checklist is intended to help the Chairman of the Board of Directors focus Board discussions on key corporate issues faced by the companies. vii Best Practices Best Practices summarizes OECD Principles of Corporate Governance, as well as leading national standards from other countries. Comparative Practices Comparative Practices illustrates how other countries currently approach corporate governance issues. It highlights red flags, i.e. common corporate governance abuses as well as model company practices in good corporate governance. Company Practices Mini-Case: Mini-Case 1 • Mini-cases illustrate abstract concepts and show the real problems that companies face. • Figures, tables, and other illustrations are included to illustrate key concepts. • Detailed references to law and regulations refer the reader to original texts. viii Acknowledgement The preparation and publication of the Indonesia Corporate Governance Manual (the Indonesia CG Manual) involved the participation and efforts of a significant number of dedicated people. The Indonesia CG Manual was prepared based on the other CG manuals published by various IFC’s Corporate Governance Programs and adapted to Indonesia’s corporate governance legal framework and practices. The Indonesia CG Manual was produced as part of IFC’s Corporate Governance Program in Indonesia. The Manual’s text was adapted under the direction of Mr Moez Miaoui with major contributions from Mr Stefanus Handoyo, IFC, and Mrs Evi Sofiati, and IFC consultant. The development of the Manual was also contributed to by Mr Cornelius B. Juniarto, Partner, Hermawan Juniarto, and his team. The development of the Manual