I OVERVIEW OF GOVERNANCE REGIME

Indonesia is a civil law jurisdiction, and as such does not have a doctrine of precedents similar to a common law system, which means Indonesian courts are not bound by previous court decisions.

Law No. 40 of 2007 on Limited Liability Companies (Company Law) governs limited liability companies in Indonesia. The Company Law provides the general roles of shareholders, boards of directors, boards of commissioners and stakeholders of a company such as employees, business partners and the public. Further, a company's articles of association are the general governance document of the company, for example, limitation on the authority of the board of directors and the mechanism on how decisions are made at board of directors meetings, board of commissioners meetings and general meetings of shareholders. In addition, in practice, normally companies also prepare their own good corporate governance manual as a reference for the companies' ethics and business practices.

The general principle under the Company Law is that the management and its supervisors (the board of directors and board of commissioners, respectively) represent the company and not the shareholders. Under the Company Law, the board of directors is defined as the company organ with the authority and full responsibility for managing the company in the interests of the company, in accordance with the purposes and objectives of the company, and is the organ that represents the company inside and outside the courts in accordance with the provisions of its articles of association. The board of commissioners is defined as the company organ with the duty to conduct general and special supervision of, and provide advice to, the board of directors.

Further, for public companies (companies with at least 300 shareholders or listed on the Indonesia Stock Exchange (IDX)), the members of the board of directors and the board of commissioners are also subject to capital market regulations, including Law No. 8 of 1995 on Capital Markets. Public companies are also supervised by the Financial Services Authority (OJK) and the IDX. Therefore, the conduct of public companies must also comply with the regulations issued by the OJK and the IDX, which are more detailed and provide more clarity on how good corporate governance should be implemented: for example, the requirement to establish certain committees, such as an audit committee and a remuneration committee, and to have a non-affiliated director and independent commissioners.

Meanwhile, private foreign investment companies and private local companies (that obtain domestic investment company (PMDN) status from the Capital Investment Coordinating Board (BKPM)) are subject to the regulations regarding the field of capital investment. Other specific sectors may also have laws and regulations governing how entities engaged in the relevant sectors conduct their corporate governance, for example banks and non-bank financial institutions, and have guidance on compliance with good corporate governance.

In relation to licensing, the government is currently moving all licensing systems into one large national investment licensing platform, the Online Single Submission (OSS) system, as regulated in Government Regulation No. 24 of 2018 on Electronic Integrated Business Licensing Services. The OSS system is now operated by BKPM (initially, the Coordinating Minister of Economic Affairs took the lead in operating the OSS system when it was launched in July 2018). Companies no longer need to obtain licences from several authorities: they can now get all the licences they require through the OSS system.

Every business entity (including companies) needs to register with the OSS system. Upon registration, a business identity number (NIB), a business licence and a commercial licence (as relevant) will be issued. The NIB serves as an identity card for companies, and remains valid as long as the company operates. Sectoral ministries or government authorities (e.g., the Ministry of Trade, the Ministry of Communication and Informatics, the Ministry of Agrarian Affairs and Spatial Planning, the National Land Office) determine the business licences or commercial licences required for lines of business under their authority, and the commitments or conditions required to be fulfilled to make the business licences or commercial licences become effective. These sectoral ministries or government authorities could also determine that no commitments or conditions are required. If commitments or conditions exist, they will be mentioned in the business or commercial licences, or both, issued by the OSS system. Business licences and commercial licences will only become effective after a licence owner completes the required commitments or conditions.

II CORPORATE LEADERSHIP

i Board structure and practices

Limited liability companies in Indonesia use a two-tier management structure. The executive functions are managed by the board of directors, which is supervised by the board of commissioners. The board of commissioners does not have an executive function or authority, except in the absence of all members of the board of directors or if all members of the board of directors have conflicting interests with the company. Companies with a shariah-related business activity should have a shariah supervisory board.

The board of directors or the board of commissioners may consist of one or more members. If the board of directors consists of two or more members, the liability is joint and several for each member. A company must have at least two members on the board of directors and two members on the board of commissioners if the company is a public company or if it is collecting or managing public funds or issuing acknowledgements of indebtedness to the public.

If the board of directors consists of more than one member, any member of the board of directors has the authority to act for and on behalf of the board of directors and to represent the company unless the company's articles of association specify otherwise. In practice, there are a variety of structures used by shareholders and inserted into the articles of association to limit the authority of the members of the board of directors to represent the company, including the following:

  1. the articles of association require two directors to act for and on behalf of the board of directors and the company;
  2. the articles of association require the president director together with one other director to act for and on behalf of the board of directors and the company;
  3. the articles of association require that in the absence of the president director, one other director may only act for and on behalf of the company if he or she has first received a written appointment from the president director; and
  4. the articles of association require the board of directors to obtain approval from the board of commissioners or the general shareholders' meeting before proceeding with a corporate action.

The above depend on the how the shareholders want a company to run its daily activities.

If a director is a party to a court dispute with the company or has a conflict of interest with the company, that director cannot represent the company. In this case, the company must be represented by any of the following:

  1. another director or other directors who do not have a conflict of interest with the company;
  2. the board of commissioners in the event that all members of the board of directors have conflicts of interests with the company; and
  3. another party appointed by a general shareholders' meeting if all members of the board of directors and the board of commissioners have conflicts of interests with the company.

Unlike the board of directors, if the board of commissioners has more than one member, no member may act alone in representing the board of commissioners unless it is based on resolutions of the board of commissioners.

The board of directors must act only in the best interests of the company and in accordance with the company's purpose and objectives. Every director is obligated to fulfil his or her tasks in good faith and with full responsibility. Each director will be personally liable if he or she is wilfully negligent and does not execute his or her tasks as mentioned above unless the director can prove all of the following (as relevant):

  1. the bankruptcy of the company was not caused by his or her fault or negligence;
  2. he or she has conducted the management of the company in good faith and with prudence;
  3. he or she does not have a personal interest, directly or indirectly, in the management act that caused the bankruptcy; and
  4. he or she has taken steps to prevent the bankruptcy from occurring.

Under the Company Law, similar to the board of directors, each member of the board of commissioners must undertake his or her duties in good faith and with full responsibility in the interests of the company, in accordance with the purposes and objectives of the company. The main duties of the members of the board of commissioners are to supervise the board of directors's management policy and to give it advice. The members of the board of commissioners are obliged to fulfil their tasks in good faith and with full responsibility in the company's interests.

The distribution of the tasks and authorities of the board of directors is determined by a general shareholders' meeting, or by the board of directors itself if the general shareholders' meeting does not do so. No law restricts a director from delegating certain responsibilities to other parties, but the director shall continue to be liable for all actions taken by the delegate.

ii Directors

The Company Law does not recognise chair or CEO positions: it only acknowledges the position of members of the board of directors (or board of commissioners in the absence of a board of directors) who may act for and on behalf of the company. In practice, some companies include persons in senior positions, such as a chair or CEO, as members of the board of directors, who are appointed through a general shareholders' meeting, with the following reasons under the Company Law: only the board of directors can act for and on behalf of a company; and only members of the board of directors have rights to attend and vote in board of directors meetings. Therefore, if a CEO or chair is not a member of board of directors, they cannot act for and on behalf of the company (e.g., represent the company and sign any agreements or documents on behalf of the company) unless they are given the authority to act by the board of directors under powers of attorney. Further, a CEO or chair who are not members of the board of directors also do not have rights to attend and vote in board of directors meetings, and the employment relationship between the CEO or chair and the company would merely be an employee–employer relationship.

Under the Company Law, the remuneration of directors is usually determined by the shareholders (unless such determination is delegated to the board of commissioners) through a general shareholders' meeting, and the remuneration of the commissioners is determined by the shareholders through a general shareholders' meeting. Further, the Company Law does not stipulate the remuneration of senior management who are not members of the board of directors. Therefore, the senior management would likely be treated as employees of the company, and their remuneration would be determined by the board of directors or the remuneration policy that has been implemented in the company.

iii Takeover

Takeovers and acquisitions are legal actions taken by a legal entity or an individual to acquire shares in a company that result in a change of control in the company. Although there is no clear definition of control under the Company Law, the common view is that a transfer or acquisition that results in the acquirer holding a majority of the shares or more than 50 per cent of the shares in a company is a takeover that results in a change of control. Another trigger for a change of control is an action that results in the ability to nominate directors and commissioners, and to stipulate management policies shifting to the acquiring entity, but this is more relevant to the takeover of a public company.

The Company Law requires several actions to be conducted by the boards of directors of the acquiring and target companies in relation to protecting any party having interests in the target company: for example, creditors and employees of the target company.

The boards of directors of the acquiring and target companies should announce the abridged acquisition plan in one national newspaper, and in writing to the employees of the target company, at the latest 30 days before the calling of the general shareholders' meeting. The newspaper announcement must include a notice that interested parties can obtain copies of the acquisition plan from the companies' offices from the date of the newspaper announcement until the date of the general shareholders' meeting. The creditors of the target company have 14 days after the date of the announcement to file their objections to the plan of the acquisition. If no creditors' objections are filed within this period, the creditors will be deemed to have approved the acquisition. If objections are filed by creditors, the board of directors of the target company must first settle the objections. If any objections remain unsettled on the date of the general shareholders' meeting, these objections must be presented at the general shareholders' meeting to be settled. If any objections remain unsettled after the general shareholders' meeting, the acquisition cannot be continued.

In addition to the above, the board of directors of the target company should also announce the change of ownership due to the acquisition to its employees in accordance with Law No. 13 of 2003 on Labour (Labour Law). The target company's employees may choose to not continue their employment and be paid with the applicable termination payments for the change of ownership in the target company under the Labour Law).

III DISCLOSURE

i Financial reporting

The Company Law obliges every company to make an annual report. The board of directors must submit the annual report to the general shareholders' meeting after it has been reviewed by the board of commissioners, no later than six months after the end of the company's financial year. The annual report must contain at least:

  1. financial statements;
  2. a report on the company's activities;
  3. a report on the implementation of social and environmental responsibility;
  4. details of issues during the financial year that affect the company's activities;
  5. a report on the supervisory duty that has been performed by the board of commissioners during the previous financial year;
  6. the names of the members of the board of directors and board of commissioners; and
  7. the remuneration for the members of the board of directors, and the remuneration and compensation for the members of the board of commissioners for the previous year.

ii Audited annual report

Under the Company Law, a company's annual report should be audited if:

  1. the activities of the company are to collect or to manage funds from the public;
  2. the company issues a debt acknowledgement letter to the public;
  3. the company is a public company;
  4. the company is a state-owned company;
  5. the company has assets or business turnover worth at least 50 billion rupiah; or
  6. it is required pursuant to the prevailing regulation.

If the company fulfils one of the above conditions, but the annual report is not audited, the general shareholders' meeting must not approve the financial statements. After the general shareholders' meeting approves the annual report, balance sheet, and profit and loss statement of the company, the following information must be published in a newspaper: that the company's activities are to collect or to manage funds from the public; that the company issues a debt acknowledgement letter to the public; or that the company is a public company.

The purpose of this publication is so that the company is transparent and accountable to the public.

Further, the Company Law also requires financial statements of a company to be filed with the Minister of Trade. There are concerns from private companies about confidentiality, and as a consequence the level of compliance is low.

iii Mandatory disclosure

The Company Law does not contain extensive stipulations about the mandatory disclosure obligation or a comply and explain model for the implementation of corporate governance by private companies. Meanwhile, the capital market regulations specifically govern those matters, which are applicable for public companies.

With respect to mandatory disclosure, public companies are required to make a disclosure (whether periodical or incidental) under the prevailing capital market rules. For example:

  1. disclosure of quarterly, semesterly and annual reports;
  2. disclosure of the occurrence of any material information or facts;
  3. disclosure of certain transactions (e.g., affiliated party or material transactions);
  4. disclosure of certain corporate actions (e.g., rights issues and non-preemptive rights); and
  5. disclosure for the purpose of convening a general shareholders' meeting.

The Company Law regulates the mandatory disclosure (in the form of a newspaper announcement or notification to the employees, or both) for private companies that would like to conduct the following corporate actions (among others):

  1. acquisitions, mergers, consolidations and spin-offs;
  2. capital reduction;
  3. nullification of the appointment of members of the board of directors who fail to meet the requirements according to the Company Law;
  4. nullification of the appointment of members of the board of commissioners who fail to meet the requirements according to the Company Law;
  5. remittance of shares in the form of immovable goods; and
  6. dissolution and liquidation.

Moreover, the Company Law does not adopt the comply or explain model. Nevertheless, OJK Regulation No. 21 /POJK.04/2015 on the Corporate Governance Implementation for Public Companies allows public companies to apply corporate governance through a comply or explain approach, where public companies may either comply with the prescribed guideline by the OJK, or explain why they have not complied and what steps they are taking to comply in the future. The OJK uses this approach to promote the implementation of good corporate governance for public companies, because not every aspect of corporate governance could be implemented equally for all public companies, due to differences in the business sector, type of industry, size and complexity of each company.

iv Shareholders' meetings with the board of directors

The Company Law does not regulate one-on-one meetings of directors with shareholders. Normally, shareholders will have a meeting and discussion with the directors through a general shareholders' meeting. There are two types of general shareholders' meeting: an annual general shareholders' meeting that is conducted annually, and an extraordinary general shareholders' meeting that may be held at any time pursuant to the needs and interests of a company.

The general shareholders' meeting may adopt resolutions if they meet the quorum and voting criteria as stipulated under the Company Law and articles of association. Consequently, any discussion between the shareholders and directors outside of the meeting should not bind the directors in running the company's activities.

IV CORPORATE RESPONSIBILITY

i Risk management committee

A non-financial services company is not required by the Company Law to have a risk management committee within its management structure. Nevertheless, the OJK regulations require financial services companies (e.g., banks and insurance companies) to have a risk management plan, including having a special officer or committee responsible for all risk management issues (e.g., liquidity, financial compliance). In practice, some non-financial services companies may have established risk management committees, as this may indicate good corporate governance to mitigate or control risks within their companies.

In the absence of a risk management committee, the board of directors is responsible for managing the risks, as the board of directors must act only in consideration of the best interests of the company and in accordance with the company's purpose and objectives.

ii Compliance

The Company Law provides general requirements regarding a company's compliance. Meanwhile, Law No. 25 of 2007 on Investment (Investment Law) provides more extensive compliance requirements as follows:

  1. implementing the principles of good corporate governance;
  2. carrying out corporate social responsibility (CSR) programmes;
  3. submitting investment activities reports to the BKPM;
  4. complying with all applicable laws and regulations; and
  5. respecting cultural traditions of communities living around the business locations of investments.

iii Whistle-blowing

The Labour Law provides protections for employees who have knowledge of criminal acts of their employers (e.g., corruption, bribery) and have reported those criminal acts to the relevant government authority. This means that Indonesian law gives protection to whistle-blowers.

The implementation of whistle-blower protections arose following practices and scandals, including but not limited to corruption and fraud, involving companies with government institutions and government officials. Whistle-blowing has now become a trend, and one of the main goals of the government is to eradicate corruption in Indonesia.

iv Corporate social responsibility

Under the Company Law, a company that operates in the natural resources field or is related to natural resources is obliged to conduct CSR. A CSR plan must be inserted into a company's annual report to be approved by the board of commissioners or the general shareholders' meeting. Nevertheless, the Company Law is silent on the sanctions that will be imposed on a company if the board of commissioners or shareholders do not approve a CSR plan so that it cannot be conducted or implemented.

The Investment Law, which is currently only applicable for private foreign investment companies and private local companies, provides sanctions for the failure to conduct CSR as follows:

  1. a written warning;
  2. a limitation of business activities;
  3. the temporary suspension of business activities or capital investment facilities, or both; and
  4. the revocation of business activities or capital investment facilities, or both.

Moreover, there are no provisions that set out a CSR threshold that companies must meet. Without a threshold, companies may not implement a CSR plan effectively; therefore, this can be deemed to be allowing companies to perform their CSR commitments in any manner they choose as long this fulfils their CSR obligations.

The concept of CSR in Indonesia has been widened by numerous companies, covering, inter alia, employee, consumer and social aspects. Although CSR obligations are not mandatory for companies, some companies have adopted this approach to ensure that the welfare of their employees, consumers and society are accommodated in various forms. Examples of CSR include leadership training for employees and consumer complaints hotlines. By adopting a CSR concept that covers numerous aspects (i.e., not limited to the environment and social wellbeing), companies may enjoy a good corporate image and reputation.

V SHAREHOLDERS

i Shareholder rights and powers

Shareholders' voting rights

Each of a company's shares gives a right of one vote to its holder, unless the articles of association determine otherwise. The articles of association may determine the classification of each share issued by the company. Under the Company Law, the classification of shares includes, among others, shares:

  1. with or without voting rights;
  2. with special rights to nominate members of the board of directors and the board of commissioners;
  3. that after a certain period are withdrawn or exchanged for other shares classifications;
  4. that entitle their holders the priority to receive dividends before the holders of shares with another classification in the allocation of dividends cumulatively or non-cumulatively; and
  5. that entitle their holders the priority to receive allocations of the remainder of the company's assets in liquidation.

As described above, a company may issue shares without voting rights. Although the shares were issued with voting rights, a voting right does not apply to the shares if the company's shares are controlled by the company itself, or (either directly or indirectly) by another company whose shares are directly or indirectly owned by the company.

In addition, holders of a fraction of a nominal value of shares (fraction) do not have individual voting rights. As an exception, the holders will have voting rights if, individually or jointly with other holders, they hold a fraction belonging to the same classification of shares with a nominal value that is as much as one nominal share of the classification.

For shares with voting rights, even though the voting rights of shares are encumbered by pledge or fiduciary, the holder of the shares still has the right to cast a vote in the general shareholders' meeting for those encumbered shares.

The powers of shareholders to influence the board of directors

The Company Law regulates that the authority of the board of directors to act for and on behalf of the company is unlimited and unconditional unless stipulated otherwise by the Company Law, the articles of association or the approval of the general shareholders' meeting. Therefore, it is clear that shareholders may influence the board of directors through the approval of the general shareholders' meeting. For instance, before starting the next financial year, the board of directors shall prepare an annual action plan to be approved by the shareholders at the general shareholders' meeting. In practice, to get the approval of the shareholders, the board of directors will prepare an annual action plan that is relevant to the objective and purpose of the company and the vision of shareholders. The company's articles of association may also require the board of directors to first obtain the approval of the general shareholders' meeting for certain corporate actions before proceeding. Below are the quorum and voting rights required under the Company Law for a company to take certain corporate actions:

General shareholders' meeting Quorum Votes required to adopt a resolution
1 General shareholders' meeting to adopt a resolution to:
  1. approve the business plan,* annual report,† the appointment or change of members of the board of directors and board of commissioners, and the increase of the issued and paid up capital; and
  2. determine the use of net profits and the amount of reserved fund‡
More than half More than half of the votes
If the quorum of the first general shareholders' meeting is not satisfied, a second general shareholders' meeting may be held
If the quorum of the second general shareholders' meeting is not satisfied, upon the company's request, the quorum will be determined by the chief justice of the district court where the company is domiciled
At least one-third More than half of the votes
2 General shareholders' meeting to adopt a resolution to:
  1. amend the company's articles of association; and
  2. approve the increase of the authorised capital and the reduction of the capital
At least two-thirds At least two-thirds of the votes
If the quorum of the first general shareholders' meeting is not satisfied, a second general shareholders' meeting may be held At least three-fifths At least two-thirds of the votes
3 General shareholders' meeting to adopt a resolution to approve the merger, consolidation, acquisition or bankruptcy application of the company, extension of the term of the company and dissolution of the company At least three-quarters At least three-quarters of the votes
If the quorum of the first general shareholders' meeting is not satisfied, a second general shareholders' meeting may be held At least two-thirds At least three-quarters of the votes
4 General shareholders' meeting to adopt a resolution to transfer or place as security the entire or a substantial part of the company's assets At least three-quarters At least three-quarters of the votes
If the quorum of the first general shareholders' meeting is not satisfied, a second general shareholders' meeting may be held At least two-thirds At least three-quarters of the votes
5 General shareholders' meeting to adopt a resolution to repurchase the company's shares At least two-thirds At least two-thirds of the votes
If the quorum of the first general shareholders' meeting is not satisfied, a second general shareholders' meeting may be held At least three-fifths At least two-thirds of the votes
* The approval can be delegated to the board of commissioners
† Note that an annual report is approved in an annual general shareholders' meeting
‡ Note that the use of net profits and the amount of reserved fund is determined in an annual general shareholders' meeting

A company's articles of association may stipulate different quorum and voting requirements for a general shareholders' meeting required to pass resolutions. However, the articles of association may only stipulate higher (not lower) quorum and voting requirements from those provided under the Company Law.

ii Shareholders' duties and responsibilities

In general, the Company Law does not put the obligation for corporate governance to the shareholders. However, in some highly regulated sectors – for example, insurance – the controlling shareholders may be required to declare that they are the parties responsible for the insurance company.

iii Shareholder activism

If a shareholder disagrees about actions of the company that are causing harm to that shareholder or to the company itself, that shareholder has a right to sell its shares to the company at a reasonable price in the form of one of the following an amendment to the articles of association of the company, a transfer and encumbrance of more than 50 per cent of the net assets of the company; and a consolidation, merger, acquisition or spin-off of the company.

In the above situation, the shares are to be purchased or repurchased by the company. In the event that such temporary ownership of shares by the company exceeds the threshold allowed under the Company Law, then the company must find a third party to buy those shares. Concerning the threshold, the buyback must not cause the net assets of the company to be lower than the aggregate of the subscribed capital and the statutory reserves of the company; and the total nominal value of the shares that are owned by the company or its subsidiaries (including those held under security) must not exceed 10 per cent of the nominal value of the issued shares in the company).

Further, if the shareholder is harmed by an action of the company that he or she considers to be unfair and unreasonable as a result of resolutions of the general shareholders' meeting, board of directors or board of commissioners, the shareholder has a right to lodge an action against the company before the relevant district court.

The Company Law also allows shareholders that hold at least 10 per cent of the issued voting shares in a company to lodge an examination of the company to the district court on the basis that the company has suffered losses as a result of illegal activity or negligence by the members of the board of directors and board of commissioners.

iv Takeover defences

As mentioned above (see Section V.i), certain decisions may not be taken by the board of directors without shareholder approval. For example:

General shareholders' meeting Quorum Votes required to adopt a resolution
1 General shareholders' meeting to adopt a resolution to:
  1. amend the company's articles of association; and
  2. approve the increase of the authorised capital and reduction of the capital
At least two-thirds At least two-thirds of the votes
If the quorum of the first general shareholders' meeting is not satisfied, a second general shareholders' meeting may be held At least three-fifths At least two-thirds of the votes
2 General shareholders' meeting to adopt a resolution to approve the merger, consolidation, acquisition or bankruptcy application of the company, extension of the term of the company and dissolution of the company At least three-quarters At least three-quarters of the votes
If the quorum of the first general shareholders' meeting is not satisfied, a second general shareholders' meeting may be held At least two-thirds At least three-quarters of the votes
3 General shareholders' meeting to adopt a resolution to transfer or place as security the entire or a substantial part of the company's assets At least three-quarters At least three-quarters of the votes
If the quorum of the first general shareholders' meeting is not satisfied, a second general shareholders' meeting may be held At least two-thirds At least three-quarters of the votes

Further, the Company Law also allows shareholders to include additional provisions in the articles of association to limit the board of directors' authority to conduct certain corporate actions (e.g., requiring approval from the board of commissioners or the shareholders, or both).


Footnotes

1 Daniel Pardede is a partner and Syafrullah Hamdi is an associate at Hadiputranto, Hadinoto & Partners (HHP Law Firm), a member of Baker & McKenzie International.