11.2.4 Invalidation of Affiliated Transactions . . . . . . . . . . . . . . . . . . . . . . .

320

11.2.5 Liability for Violation of Procedural Requirements . . . . . . . . . . 321

CHAPTER 12. Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 322

12.1 General Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 324

12.1.1 Dividend Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 325

12.1.2 Types of Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 325

12.1.3 Forms of Dividend Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 326

12.1.4 Dividend Amounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 326

12.2 Procedures for Declaring and Paying Dividends . . . . . . . . . . . . . . . . . . . 328

12.2.1 Declaring Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 328

12.2.2 Shareholder List . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 330

12.2.3 Paying Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331

12.2.4 Information Disclosure on Dividends . . . . . . . . . . . . . . . . . . . . . . . 331

CHAPTER 13. Charter Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 333

13.1 General Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 336

13.1.1 Definition of Charter Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 336

13.1.2 Legal Capital or Minimum Charter Capital . . . . . . . . . . . . . . . . . . 336

13.1.3 Charter Capital and Share Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . 337

13.1.4 Full Payment of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 338

13.1.5 Contributions to the Charter Capital . . . . . . . . . . . . . . . . . . . . . . . . 339

13.2 Increasing Charter Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341

13.2.1 Methods to Increase Charter Capital . . . . . . . . . . . . . . . . . . . . . . . . 341

13.2.2 Methods of Placement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 344

13.2.3 Procedural Guarantees for Increasing Charter Capital . . . . . . 344

13.3 Protecting Charter Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 346

13.3.1 Decreasing Charter Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 347

13.3.2 Share Buybacks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349

13.3.3 Reciprocal Shareholdings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353

13.4 Statutory and Voluntary Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 354

13.4.1 Statutory Reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 354

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 13.4.2 Other Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 354

CHAPTER 14. Corporate Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 356

14.1 Overview of Corporate Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 359

14.2 Types of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 364

14.2.1 Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 364

14.2.2 Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 365

14.3 Issuing Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 371

14.3.1 Decision Making Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 373

14.3.2 Registering a Decision to Issue Securities . . . . . . . . . . . . . . . . . . . 374

14.3.3 Approval of Securities Registration Dossier . . . . . . . . . . . . . . . . . 380

14.4 Conversion of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 385

14.5 Derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 386

14.6 Raising Capital in International Markets . . . . . . . . . . . . . . . . . . . . . . . . . 388

CHAPTER 15. Corporate Governance Framework of Indonesian

State-Owned Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 390

15.1 Origin of Indonesian State-Owned Enterprises . . . . . . . . . . . . . . . . . . . 391

15.2 Legal and Regulatory Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 392

15.3 Governance Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 394

15.3.1 The State as Owner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 394

15.3.2 Responsibilities of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 395

15.3.3 Equitable Treatment of Shareholders . . . . . . . . . . . . . . . . . . . . . . . 397

15.3.4 Stakeholder Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 399

15.3.5 Transparency and Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 402

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CHAP Table of
Contents

TER 1.
An In
troduc CHAPTER 1

tion to
An Introduction
to Corporate
Governance

Corpo
rate
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THE CHAIRMAN’S
CHECKLIST

Do the general meeting of shareholders (GMS), the board of

commissioners (BoC), and the board of directors (BoD) understand the
concept of corporate governance and its significance to the company
and its shareholders?

Are key officers familiar with the G20/OECD Principles of Corporate

Governance as well as the legal and regulatory framework that is
applicable to companies in Indonesia?

Do the BoC and BoD understand their roles and responsibilities?

Does the company have a robust internal control and risk management
framework?

Has the BoC developed a clear governance policy?

Have steps been taken to improve the company’s corporate governance

practices in accordance with this policy?

Does the company follow mandatory corporate governance

requirements and disclose information on compliance to shareholders
and stakeholders in the annual report? Has the company adopted its
own corporate governance code? Has the company included a report on
its corporate governance structure and practice in the annual report?

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Is the company familiar with the main institutions active in the field of
corporate governance that can serve as external resources?

Corporate governance has become a familiar term in Indonesia. The private

sector’s role in promoting economic growth and creating jobs began to
accelerate with the introduction of the Indonesian Company Law in 1995.
The two decades that followed brought increasingly sophisticated domestic
production, private enterprise growth, and increased global competition. The
downside to these developments has been the occurrence of major corporate
scandals. While various domestic and international efforts have made corporate
governance a household phrase, few Indonesian companies appear to truly
appreciate the depth and complexity of this topic. Indeed, companies in
Indonesia often introduce corporate governance reforms only at a superficial
level, such as to support a public relations strategy. In doing so, they miss
valuable opportunities to introduce the internal structures and processes that
enable a company to maintain shareholders’ confidence, increase access to
capital, and reduce vulnerability to financial crises.

This chapter defines corporate governance, makes a business case for its
implementation, and provides an overview of the legal, regulatory, and
institutional frameworks relevant to corporate governance in Indonesia today.

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1.1 Definition of Corporate

Governance

There is no single definition of corporate governance that applies to all

situations and jurisdictions. Variations arise depending on the institution,
national context, and legal tradition.

IFC defines corporate governance as “the structures and processes by which

companies are directed and controlled.” The Organization for Economic
Co-operation and Development (OECD), which published its Principles of
Corporate Governance in 1999 and reviewed the Principles in 2004 and 2015,
offers a more detailed definition:1

“Corporate governance involves a set of relationships between a company’s

management, its board, its shareholders and other stakeholders. Corporate
governance also provides the structure through which the objectives of the
company are set, and the means of attaining those objectives and monitoring
performance are determined.”

Most definitions that center on the company itself (an internal perspective) have
certain elements in common. These can be summarized as follows:

• Corporate governance is a system of relationships, defined by

structures and processes. For example, the relationship between
shareholders (as the providers of capital), the company management,
and stakeholders. Through their relationships, shareholders,
management, and stakeholders share a mutual interest in maximizing
the rate of return from shareholders’ investment. Other specific
relationships exist between a company’s BoD, BoC or other
supervisory body, and its shareholders. The BoD must provide
shareholders with financial and operational reports on a regular
basis and in a transparent manner. The BoC performs a supervisory
function over the BoD. As such, the BoD is accountable to the BoC,
which in turn must be accountable to all shareholders through the
GMS. The structures and processes that define these relationships
typically center on specific management performance and reporting
mechanisms.

1
G20/OECD Principles of Corporate Governance (Paris: OECD Publishing, 2015), 9.

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• These relationships may involve parties with different and sometimes

conflicting interests. The various company organs—the GMS, the
BoC, and the BoD—can hold different interests at any given time.
Conflicting interests typically exist between shareholders (principals)
and managers (agents), also known as the principal-agent problem.
A principal-agent problem arises when the person who owns a firm is
not the same as the person who manages or controls it. For example,
although shareholders are interested in maximizing shareholder
value, the BoD may have other objectives, such as maximizing
their salaries, which sometimes leads to excessive risk-taking at the
expense of the company’s long-term interest. Conflicts may also exist
within each governing organ, such as between shareholders (majority
versus minority, controlling versus non-controlling, individual versus
institutional) and company organs (executive versus non-executive,
outsiders versus insiders, independent versus dependent). These
tensions need to be carefully monitored and balanced.

• All parties are involved in the direction and control of the company.
The GMS, representing shareholders, makes fundamental decisions
such as those concerning the distribution of profits. The BoC
is generally responsible for providing guidance and oversight,
reviewing and monitoring the implementation of company strategy,
and overseeing the BoD’s performance. The BoD runs the day-to-
day operations, such as implementing strategy, drafting business
plans, managing human resources, developing marketing and sales
strategies, and managing assets.

• Corporate governance is designed to properly distribute rights

and responsibilities in order to promote stable, long-term value
to shareholders. For instance, with appropriate balancing of the
interests between shareholders, the BoC, and the BoD, minority
shareholders will have the means to prevent a controlling shareholder
from gaining undue benefits through related party transactions,
tunneling, or other similar activity.

Figure 1 depicts the relationships between the governing bodies in a basic

corporate governance system.

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Figure The Corporate Govenance System

Shareholders
[General Meeting of Shareholders]

Appoint

Commissioners
Appoint Report to
[Board of Commissioners]

Supervise

Directors
[Board of Directors]

Elect, Terminate, and Guide Report and Respond to

Managers

The external perspective of corporate governance, on the other hand,

concentrates on relationships between the company and its stakeholders.
Stakeholders are those individuals or institutions that have an interest in the
company. Such interests may arise through legislation or contract, or by way
of social or geographic relationships. Stakeholders include investors, as well as
employees, creditors, suppliers, consumers, regulatory bodies and state agencies,
and the local community or environment in which a company operates.

Many international codes, including the OECD Principles, discuss the role of
stakeholders in the governance process. The stakeholder’s role in governance has
been debated in the past, with some arguing that stakeholders have no claim on
the company other than those specifically set forth in law or contract. This view
is found in many countries with a common law tradition, such as the United
Kingdom, the United States, and Australia. Others argue that companies fulfill
an important social function, have a societal impact, and accordingly must act
in the broader interests of society. This view, which is present in many countries
with a civil law tradition, mostly in continental Europe, such as France,
Germany, the Netherlands, and their former regions of influence, recognizes
that companies should, at times, act at the expense of shareholders to fulfill
stakeholder requests.

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Best
Practice
A key aspect of corporate governance involves ensuring the flow of
external capital to firms. Corporate governance is also concerned
with finding ways to encourage shareholders to undertake socially
efficient levels of investment in firm-specific human and physical
capital. The competitiveness and ultimate success of a corporation
is the result of teamwork that embodies contributions from
a range of resource providers including investors, employees,
creditors, and suppliers. Corporations should recognize that
stakeholders’ contributions constitute a valuable resource for
building competitive and profitable companies. It is therefore in
the interest of the company to develop productive cooperation
with its stakeholders, establish a governance framework to
acknowledge the existence of these interests, and recognize their
importance for the company’s long-term success.

A Brief History of Corporate Governance

1.1.1

Systems of corporate governance have evolved over centuries, often in response

to systemic crises or corporate failures. The first significant example was the
collapse of the British South Sea Company in 1720. This created the well-
documented South Sea Bubble which revolutionized business law and practice
in England. Similarly, much of U.S. securities law was put in place following the
stock market crash of 1929. There has been no shortage of other crises, such
as the secondary banking crisis of the 1970s in the United Kingdom, the U.S.
savings and loan debacle of the 1980s, the 1998 financial crisis in Russia, the
1997-1998 Asian financial crisis (the effects of which were particularly severe in
Indonesia, South Korea, and Thailand), and the global financial crisis of 2008.

The history of corporate governance is also punctuated by a series of high-

profile company failures. In the United Kingdom, the early 1990s saw the
collapse of Barings Bank. The new century likewise opened with the dizzying
fall of Enron in the United States, the near-bankruptcy of Vivendi Universal in
France, the scandal at Parmalat in Italy, trading fraud at Société Générale, and

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the multi-billion dollar Madoff Ponzi scheme. Governments responded to each

of these corporate failures–often resulting from lack of oversight, incompetence,
or outright fraud–by implementing new governance frameworks such as the
United States’ Sarbanes-Oxley Act for Public Company Accounting Reform and
Investor Protection, other similar national corporate governance codes, and the
current trend towards imposing stricter regulatory oversight on banking and
financial institutions in many countries.

In Indonesia, the financial crisis of 1997-1998 sparked dramatic social,

economic, and political effects. That event caused the Indonesian rupiah to
depreciate by almost 80 percent, dramatically increasing poverty. As Furman
and Stiglitz note, “The depth of the collapse in Indonesia is among the largest
peacetime contractions since at least 1960 (excluding the experience of the
transition economies of eastern Europe and the former Soviet Union).”² Many
experts consider Indonesia’s recession to have been fueled by an extremely
poor supervision of the financial sector and lax enforcement of central bank
regulations, which compounded irregular banking practices.

Although there is still great need for improvement, the Indonesian business
community’s awareness and understanding of the importance of corporate
governance has improved dramatically since then. This change corresponds
with ongoing advances made to the legal and regulatory corporate governance
framework.

In recent years, Indonesia has implemented a number of initiatives to strengthen

its corporate governance regime. These efforts include the establishment
of corporate governance institutions and the adoption of new laws (or
amendments to existing regulations) that support the implementation of good
corporate governance processes. These measures include the establishment of the
National Committee on Corporate Governance in 1999 under the supervision
of the Coordinating Minister for Economic Affairs. The committee issued
Indonesia’s first Code of Good Corporate Governance (“CG Code”) in 1999,
which was later amended in 2001 and 2006. The Capital Markets and Financial
Institutions Supervisory Agency, now merged into the Financial Services
Authority (Otoritas Jasa Keuangan or OJK), also continues to advance and
enforce its regulatory framework to improve investor protection. With respect
to the banking sector, Indonesia’s central bank, Bank Indonesia, introduced
corporate governance rules in 2006 which it actively monitors and enforces.

Table 1 illustrates key corporate governance developments, including those in

Indonesia.

2
Jason E. Furman and Joseph E. Stiglitz, "Economic Crises: Evidence and Insights from East Asia,"
Brookings Papers on Economic Activity, no. 2 (1998), 3.

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