The Corporate Governance Review: Indonesia
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, as amended by Law No. 11 of 2020 on Job Creation, (the Company Law) governs limited liability companies in Indonesia. The Company Law provides the general roles of shareholders, boards of directors and boards of commissioners. Further, a company's articles of association are the general governance document of the company, citing, for example, limitations on the authority of the board of directors and the mechanism on how decisions are made at meetings of the board of directors and board of commissioners, and at general meetings of shareholders. In addition, in practice, normally companies also prepare their own good corporate governance manual as a reference for their ethics and business practices.
The general principle under the Company Law is that a company's 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 (i.e., those with at least 300 shareholders and paid-up capital of at least 300 billion rupiah), 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). Therefore, the conduct of public companies must also comply with the regulations issued by OJK, which are more detailed and provide clarity on how corporate governance should be implemented; for example, the requirement to establish certain committees and functions, such as an audit committee and a nomination and remuneration function, and for at least 30 per cent of the commissioners to be independent.
Private foreign investment companies and private local companies 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 (such as 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 the Indonesian Investment Coordinating Board (the BKPM, a non-ministerial government agency): initially, the Coordinating Minister of Economic Affairs had taken the lead in operating the OSS system when it was launched in July 2018. For most sectors, 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 for 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, and 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 (and requirements to process the commitments or conditions). These sectoral ministries and 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 via the OSS system. Business licences and commercial licences will become effective only after a licence owner completes the required commitments or conditions.
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. The articles of association require, among other things:
- two directors to act for and on behalf of the board of directors and the company;
- the president director and one other director to act for and on behalf of the board of directors and the company;
- 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; or
- 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-mentioned requirements depend on 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 situation, the company must be represented by any of the following:
- another director or other directors who do not have a conflict of interest with the company;
- the board of commissioners, in the event that all members of the board of directors have conflicts of interest with the company; or
- another party appointed by a general shareholders' meeting if all members of the board of directors and the board of commissioners have conflicts of interest 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 obliged 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 he or she can prove all the following (as relevant):
- the losses of the company were not caused by his or her fault or negligence;
- he or she has conducted the management of the company in good faith and with prudence, and in line with the purposes and objectives of the company;
- he or she does not have a personal interest, directly or indirectly, in the management act that caused the losses; and
- he or she has taken steps to prevent the occurrence or continuation of such losses.
Under the Company Law, similarly 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' management policy and to give it advice.
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.
The Company Law does not recognise the positions of chair or chief executive officer (CEO): 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 the board of directors, he or she 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 he or she is given the authority to act by the board of directors under powers of attorney. Further, a CEO or chair who is not a member of the board of directors also does not have rights to attend meetings of the board of director or to vote at 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 that 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 probably 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.
Acquisitions (or takeovers) 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, whether existing or newly issued shares, which causes a change of control of the company. 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 acquisition 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 shareholders or the board of directors may initiate an acquisition. If the board of directors of the target and acquiring companies initiate an acquisition, the boards of directors of the acquiring and target companies must prepare an acquisition plan. The abridged acquisition plan must then be announced in at least one national newspaper and the proposed acquisition must be notified 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. Any creditors of the target company have 14 days after the date of the announcement to file objections to the acquisition plan. 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 that meeting to be settled. If any objections remain unsettled after the general shareholders' meeting, the acquisition cannot be continued.
In addition to the foregoing, under Indonesian labour laws and regulations, employees of the target company will be entitled to the statutory termination payment if their employment terminates because of the acquisition. The termination may be initiated by the employer or by the employees themselves.
With regard to public companies, takeovers and mandatory tender offers (MTOs) of public companies in Indonesia are governed by OJK Rule No. 9/POJK.04/2018 dated 27 July 2018 on Takeovers of Public Companies (POJK 9). The definition of a 'takeover' of a public company pursuant to POJK 9 is an action that directly or indirectly causes changes to the controller or controllers of a public company. The controller of a public company is defined as a party, or parties, who either:
- owns more than 50 per cent of the total issued and paid-up shares; or
- has the ability to determine, directly or indirectly, in whatsoever manner, the management or the policy of the public company, or both.
As a general rule, unless exempted, if there is a takeover, the new controller must undertake an MTO for the remaining shares at the target public company. POJK 9 regulates, among other things, the disclosure requirements for a takeover and MTO, the minimum price in an MTO and the procedures of an MTO.
i Annual report
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:
- financial statements;
- a report on the company's activities;
- a report on the implementation of social and environmental responsibility;
- details of issues during the financial year that affect the company's activities;
- a report on the supervisory duty that has been performed by the board of commissioners during the previous financial year;
- the names of the members of the board of directors and board of commissioners; and
- 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 financial statements
Under the Company Law, a company's financial statements must be audited if:
- the activities of the company are to collect or to manage funds from the public;
- the company issues a debt acknowledgement letter to the public;
- the company is a public company;
- the company is a state-owned company;
- the company has assets or business turnover worth at least 50 billion rupiah; or
- it is required pursuant to the prevailing regulation.
If the company fulfils one of the above criteria, but the financial statements are not audited, the general shareholders' meeting must not approve the financial statements. Balance sheets and profit and loss statements of companies that fall under the criterion in point (c), above, after being approved by a general shareholders' meeting, must be published in a newspaper. The purpose of this publication is so that the company is transparent and accountable to the public.
Further, Ministry of Trade regulations require audited financial statements of certain companies (including foreign investment companies, which means that foreign investment companies are also required to have audited financial statements) to be filed with the Minister of Trade. There are concerns within private companies about confidentiality in this respect 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. However, the capital market regulations specifically govern those matters that 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, disclosure:
- of quarterly, half-yearly and annual financial statements;
- of annual reports;
- of the occurrence of any material information or facts;
- of certain transactions (e.g., affiliated party or material transactions);
- of certain corporate actions (e.g., rights issues and non-pre-emptive rights issuance); and
- 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 employees, or both) for private companies that would like to conduct the following corporate actions (among others):
- acquisitions, mergers, consolidations and spin-offs;
- capital reduction;
- nullification of the appointment of members of the board of directors who fail to meet the requirements according to the Company Law;
- nullification of the appointment of members of the board of commissioners who fail to meet the requirements according to the Company Law;
- remittance of shares in the form of immovable goods; and
- dissolution and liquidation.
Furthermore, the Ministry of Law and Human Rights now requires that a company that is making applications (e.g., in respect of a change of shareholders, directors or commissioners, or to process an increase of capital) to disclose the individual ultimate beneficial owner of the 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' meetings: the annual general shareholders' meeting, which is held once a year, and extraordinary general shareholders' meetings, which may be held at any time pursuant to the needs and interests of a company.
A general shareholders' meeting may adopt resolutions provided it meets the quorum and voting criteria as stipulated under the Company Law and articles of association. Consequently, any discussion between the shareholders and directors outside the meeting should not bind the directors in running the company's activities. For public companies, there are additional requirements that must be satisfied for convening a general shareholders' meeting under the prevailing capital market rules. For example, OJK Rule No. 15/POJK.04/2020 on Planning and Conducting General Meetings of Shareholders of Public Companies (POJK 15) requires that a general shareholders' meeting:
- notification be submitted to OJK no later than five business days before the general shareholders' meeting announcement is made, excluding the date of the general shareholders' meeting announcement;
- announcement be published at the latest 14 days prior to the date of the general shareholders' meeting invitation, excluding the date of the general shareholders' meeting announcement and the date of the general shareholders' meeting invitation; and
- invitation be published at the latest 21 days prior to the date of the general shareholders' meeting, excluding the date of the general shareholders' meeting invitation and the date of the general shareholders' meeting.
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 or 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 the company.
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.
The Company Law provides general requirements regarding a company's compliance. However, Law No. 25 of 2007 on Investment as amended by Law No. 11 of 2020 on Job Creation (the Investment Law) provides more extensive compliance requirements, as follows:
- implementing the principles of good corporate governance;
- carrying out corporate social responsibility (CSR) programmes;
- submitting periodical investment activities reports;
- complying with all applicable laws and regulations; and
- respecting the cultural traditions of communities living around the business locations of investments.
The existing labour laws and regulations do not specifically address whistle-blowing by an employee. However, Law No. 13 of 2003 on Labour, as amended by Law No. 11 of 2020 on Job Creation, sets out various prohibited reasons for dismissing an employee. One of the prohibited reasons is if the employee reports a criminal action committed by the employer to the authorities. This reflects that employees who have knowledge of criminal acts of their employers (e.g., corruption or bribery) and have reported those criminal acts to the relevant government authority are protected from retaliation (in the form of termination of employment) by their employer.
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, companies that manage or utilise natural resources or whose activities may have an impact on natural resources must fulfil all relevant corporate social and environmental responsibilities. A CSR plan must be included in 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 (currently only applicable for private foreign investment companies and private local companies) provides sanctions for the failure to conduct CSR as follows:
- a written warning;
- a limitation of business activities;
- the temporary suspension of business activities or capital investment facilities, or both; and
- 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 as their CSR obligations are fulfilled.
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.
i Shareholder rights and powers
Shareholders' voting rights
Each of a company's shares gives its holder the right to one vote, 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 other things, shares:
- with or without voting rights;
- with special rights to nominate members of the board of directors and the board of commissioners;
- that after a certain period are withdrawn or exchanged for other shares classifications;
- that give their holders priority to receive dividends before the holders of shares with another classification in the allocation of dividends, whether cumulatively or non-cumulatively; and
- that give their holders 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 shares are issued with voting rights, a voting right does not apply to a company's shares if they 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.
Specifically for public companies, as far as we are aware, OJK as a matter of policy requires all issued shares to have voting rights.
Shareholders' powers 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 must prepare a business plan (including an annual budget) to be approved by the shareholders or the board of commissioners. In practice, to get the shareholders' approval, the board of directors will prepare a business plan (including an annual budget) 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||To adopt a resolution to:||More than half||More than half of all 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, at 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 all votes|
|2||To adopt a resolution to:||At least two-thirds||At least two-thirds of all 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 all votes|
|3||To adopt a resolution to:||At least three-quarters||At least three-quarters of all 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 all votes|
* The approval can be delegated to the board of commissioners
† An annual report is approved in an annual general shareholders' meeting
‡ 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.
In addition, for certain matters, public companies are subject to higher quorum and voting requirements from those provided under the Company Law. For example, for amending a public company's articles of association under POJK 15, the quorum requirement is at least two-thirds and the voting requirement is more than two-thirds.
ii Shareholder duties and responsibilities
In general, the Company Law does not place the obligation for corporate governance on the shareholders. However, in some highly regulated sectors (e.g., 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 company actions that are causing harm to that shareholder or the company itself, the shareholder has a right to sell its shares to the company at a reasonable price. The actions that may give rise to this circumstance are:
- 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; or
- consolidation, merger, acquisition or spin-off of the company.
In the above situation, the shares are to be purchased or repurchased by the company. The company can hold them only for a certain period. In the event that a 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 reserved fund 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 one or more shareholders holding at least 10 per cent of the issued voting shares in a company to lodge an examination of the company to the district court. This examination can be requested if there is reason to suspect that:
- the company has committed an unlawful act that is detrimental to the shareholders or to third parties; or
- the directors or commissioners have committed unlawful acts that are detrimental to the company, the shareholders or third parties.
iv Acquisition defences
As mentioned in 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||To adopt a resolution to:||At least two-thirds||At least two-thirds of all 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 all votes|
|2||To adopt a resolution to approve the merger, consolidation, acquisition, separation, 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 all votes|
|At least two-thirds||At least three-quarters of all votes|
|3||To adopt a resolution to transfer or place as security more than 50 per cent of the company's assets in one or more transactions||At least three-quarters||At least three-quarters of all votes|
|At least two-thirds||At least three-quarters of all 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).
1 Daniel Pardede is a partner and Preti Suralaga is manager of the corporate, compliance and services team at Hadiputranto, Hadinoto & Partners (HHP Law Firm), a member of Baker & McKenzie International.