INTRODUCTION TO CORPORATE

GOVERNANCE

Corporate Governance Workshop - EO

SESSION 1: INTRODUCTION TO
CORPORATE GOVERNANCE

October 20, 2015

Moez Miaoui

Presentation Outline:

1. What is Corporate Governance: Definition

2. Why Is Corporate Governance Important?

3. Regulatory Views and Practices in Indonesia.

4. Implementing a CG Program

5. Implementation Challenges: troubleshooting guide for Boards

1
 CORPORATE GOVERNANCE DEFINED

Shareholders
Corporate governance refers
to the structures and processes for
the direction and control
of companies

Regular reporting and update

Guidance and supervision

Management Board(s)

CORPORATE GOVERNANCE DEFINED
CORPORATE GOVERNANCE FRAMEWORK ‐ INDONESIA

Governing documents (AoA, Charters, Codes)  defined to clarify roles/rights/authorities of key governing bodies
Investment
Majority  Shareholders Investment
Minority 
 Shareholders
Actions/authorities executed via   Elect BoC/BoD via objective,  Shareholders
 Minority Shareholders granted rights/ 
shareholder channels transparent process protections
 Conduct formal annual Shareholder 
meetings
 Takes decisions on significant business 
matters, as per governing documents
 Appoint independent, external auditor
 Receive annual/quarterly reports
 Monitor & evaluate performance
Acting in the best interest of the Company

Board of Commissioners Board of Directors
Audit Committee Other Committees
BoC: BoD:
 Granted authority to guide and oversee business  Overall authority to manage the company and take 
 Provides strategic direction for the business and oversight  decisions on day‐to‐day business matters
of BoD  To be provided with clear authority, incentives, and 
 Takes decisions on specific business matters, as per  accountability
governing documents  To implement formal planning and monitoring 
 Includes independents, with proper skills processes
 Members owe fiduciary duties to the company – duty of   To establish sound frameworks for internal controls, 
loyalty and care risk management, financial management, etc.
 Committees setup as needed (e.g., Audit Committee)   To report to BoC on specific matters, as per 
comprised of board members governing documents
 Meets frequently with formal procedures

2
 WHY IS CORPORATE GOVERNANCE IMPORTANT? 
Numerous studies have confirmed the importance of  good Corporate Governance on firm performance and access 
to finance.  This is important for own IFC investments – but also to help catalyze investment across the markets we 
are striving to develop.
Investors willing to pay a premium  How much of a premium are Investors willing to 
 Improved Operational Performance
for strong corporate governance? pay?
Emerging market companies with good 
30%
governance rated 8 percentage pts higher vs.  Latin America Yes, 76% An avg. premium of 
peers in EVA (Credit Lyonnais, 2001) 20%
25% 25%
25%

 Improved Risk Management North America Yes, 76% 22% 22% 22%

21%
Companies with superior governance had much  20%
lower risk profiles (Brown, 2004)
Asia Yes, 78%
 15% 14%
Higher Firm Valuation & Share  13%

Performance
Investors willing to pay premium up to 40% for  Western Europe Yes, 78% 10%

well‐governed companies (McKinsey, 2001)
5%
 Better Access to Capital Middle East Yes, 77%
Strong correlation between good governance 
0%
and lower capital costs (Dyck &  Zingales, 2004) Indonesia China UAE Malaysia India Singapore US EU
0% 20% 40% 60% 80% 100%

 Improved Sustainability
Helps address family governance issues for  Reference: McKinsey Global Investor Opinion Survey on Corporate Governance, 2002; validated through interviews, 2005

Family‐Owned Enterprises and ease succession 
to future generations.

Why is this Important for Indonesian Companies?
Feedback from IFC Private Equity Partners
What has been the Impact of good CG?
 Improved valuation. One investor cited a recent strategic sale exit which attracted a 40% premium over the market
price, due largely to good corporate governance.
 Improved performance. A Technology investee company improved their profitability by 20% over a two-year period
due to improvements at the board level and several changes in their management control.
 Improved access to finance. Governance improvements were a significant factor (attributed at about 80%) in
helping an energy company secure capital of $4.5 million. That same company is now seeking an additional $16
million, where again good governance is reportedly playing a key factor.
 Improved risk management and cost control. One investor cited an energy services investee where there was an
approximate 30% risk factor in new projects due to poor governance. This was eliminated due to improvements in
their project risk management activities and increased board oversight and control. The improvements also led to
better decision-making and a 20% improvement in process efficiency.
 Improved stewardship. Changes to the board structure, including improved strategy setting and oversight led the
company to drop unprofitable products and re-focus on its core, high-value products, taking them to new markets.
The change helped turnaround the company from a net loss of 5% to a net profit of 10% in three years.

IFC Corporate Governance Success Stories, MENA, 2010

3
 Investor’s Perspective
Feedback from PE Investors

IFC Corporate Governance Success 
Stories, MENA, 2010

IFC Corporate Governance Success Stories, MENA, 2010

Firms with Good CG Outperform their Peers
Examples from Vietnam and Mongolia 

Vietnam Company Performance Mongolia Company Performance
ROE ROE
19.9%
20% 20%
15.8%
18%
16%
13.9%
14%
12%
10% 0%
8%
6%
Top 5 firms Bottom 5 firms
4%
2%
0%
‐20% -20.0%
Top 25 companies Bottom 25 companes

Return on Equity was substantially higher in well‐governed companies

Sources:  IFC Scorecard Reports for Vietnam and Mongolia, 2011 and 2013 respectively

Source ‐ “Vietnam Scorecard Project‐2011 Report”, IFC, SSC Vietnam, Global CG Forum, 2011

4
 What might be the drivers for a CG intervention?

 Company needing to address Governance weaknesses – e.g., Board Effectiveness, Control 

Environment, Shareholder/Disclosure Practices.

 Family Company needing specific governance help – e.g., succession issues, setting up formal 

structures, establishing family policies.

 Company seeking IPO  ‐ to help comply w/regulations and also send strong signal to market.

 Company seeking private investors – to help provide investor confidence.

 SOE that is partially private or seeking to ‘corporatize’.

 Holding companies (formal or informal) needing to setup group governance.

 MFI (or other) that is transforming to for‐profit and/or new SH structure.

 Company with new board, seeking to reinforce board roles and director duties, improve 
dynamics. 

 Company that has solid governance, but is seeking to become ‘best‐in‐class’.

Why is this Important for Indonesian Companies?
Summary of Country Results for ASEAN Scorecard
72 72 75 ASEAN scorecard 
70
58 result, mean score 
60 55 68 by country
62
50 56
49 34
40 2012
43
30 28 2013
20
10
0
ID MY PH SG TH VN

8.3 Score by Component
22.6
E. Responsibilities of the Board 26
25.19
19.51
12.1
17.17
D. Disclosure and Transparency 17.4
17.23 Vietnam
15.88
3.2 Thailand
5.84
C. Role of Stakeholders 4.5 Singapore
5.88
5.84 Philippines
6.6 Malaysia
14.24
B. Equitable Treatment 11.4
12.81 Indonesia
7.74
4.9
8.62
A. Rights of Shareholders 5.8
5.18
4.15

0 5 10 15 20 25 30
Source ‐ “ASEAN Corporate Governance Scorecard, Country Reports and Assessments 2013‐2104”, ADB

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 ASEAN Scorecard 2013‐2014 / Indonesia
CG practices continue to improve. Roadmap regulations are addressing many of the challenges and weaknesses

↓ Rights of Shareholders
• Shareholders participate in key decisions (corporate changes), approve remuneration of BoD/BoC
• BUT dividends generally paid late, AGM minutes/results weak 

↓ Equitable Treatment of Shareholders

• Classes of shares carry same voting rights 
• Policies on RPTs, CoIs, Insider Trading are in place
• BUT need to improve disclosure of AGM notices (BoC/BoD candidates background, English based notices, etc.)
• RPT disclosure still an issue (arm’s length, RPTs other than transfer pricing with subsidiaries)

↓ Disclosure & Transparency
• Disclosure of ownership structures (UBO) still weak 
• Disclosure of whistleblower policies, trainings and detailed remuneration of BoC/BoD limited/weak
• Detailed disclosure of RPTS limited: names, nature, rationale clearly provided, BUT, review/approval unclear 

↓ Responsibilities of Boards

• Responsibilities of  BoD/BoC clearly defined and disclosed as well as vision/mission
• Audit Committee practices are in line with good practices
• BUT, no disclosure about board charters
• Performance monitoring for as well as selection process of BoD/BoC inexistent/not disclosed
• Definition of independence (and tenure of independent members) unclear

Source ‐ “CG Watch 2014 – Market Rankings”, 2014, Asian Corporate Governance Association

Why is this Important for Indonesian Companies?
Asian CG Association (ACGA) Market Rankings and Scores 2014
Market category scores
(%) Total CG Rules &  Enforcement Political &  IGAAP CG Culture
Practices Regulatory
1. Hong Kong 65 61 71 69 72 51
1. Singapore 64 63 56 64 85 54
3. Japan 60 48 62 61 72 55
4. Thailand 58 62 51 48 80 50
4. Malaysia 58 55 47 59 85 43
6. Taiwan 56 48 47 63 75 47
7. India 54 57 46 58 57 51
8. Korea 49 46 46 45 72 34
9. China 45 42 40 44 67 34
10. Philippines 40 40 18 42 65 33
10. Indonesia 39 34 24 44 62 32

Source ‐ “CG Watch 2014 – Market Rankings”, 2014, Asian Corporate Governance Association

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 Indonesia ACGA Market Rankings and Scores 2014 Overview 
Indonesia has a new “CG Roadmap” to catalyze reform that encompasses extensive rule modifications regulated by 
the Financial Services Authority (Otoritas Jasa Keuangan – OJK)
• Key issues
• Launch of OJK in 2011 as a financial super‐regulator along with CG Roadmap are ambitious, far‐reaching endeavors
• Culture of compliance still drives CG practices, however some large and small caps are showing more interest
• Insider trading, lack of enforcement, inadequate regulation of RPTs, and political interference in the OJK are the biggest weaknesses
• Regulatory disclosure is improving but has a long way to go
• Although still immature, the independent audit regulatory system is taking form
Figure 16: CG Watch market scores: 2010 to 2014, Indonesia
Overall score rises from 27% in 2012 to 39% in 2014. 
(%) 2010 2012 2014 Change 2012 vs 2014 Trend of CG reform
10. Indonesia 40 37 39 (+2)  ↑ Questionable whether lofty ambitions can be achieved

Figure 17: CG Watch Indonesia macro category scores: 2010 to 2014
*scores for CG  Quick Fixes
60 rules & practices 
62 62 and CG culture  • Overhaul regulatory website to include 
decreased English content, searchable regulatory 
50 policies, and functional databases
• Produce an annual report on 
40 44 independent audit regulation and 
39 inspection
37
30 35 34 2012 • Mandate publication of all AGM voting 
33 33 32
2014 results
20 24 • Mandate disclosure of supporting info 
22 for AGM agenda resolutions and 
10 director names prior to meeting

0
CG rules & Enforcement Political & IGAAP CG culture Total
% practices regulatory

Source ‐ “CG Watch 2014 – Market Rankings”, 2014, Asian Corporate Governance Association

Indonesia Market Rankings and Scores 2014 Issues, ACGA  
CG in Indonesia remains overwhelmingly a compliance‐driven process with little evidence of CG reform or efforts that 
are not mandated or regulated somehow
↓ CG Rules and Practices (fell from 35% in 2012 to 34% in 2014)
• detailed CG statements required by the existing code are voluntary and firms choose to ignore what they do not like
• financial reporting standards vary greatly among large listed firms with a marked difference in practices between large vs. small cap listed companies
• smaller companies tend to work with smaller audit firms which plays a role in basic compliance driven reporting with few details or notes
• non‐financial reporting standards also shared marked difference in disclosure and qualitative reporting between large vs. small cap firms
• omissions include detailed ownership data of insiders, weak board remuneration data, limited info on audit/non‐audit fees
• in 2015 the OJK will introduce a comply‐or‐explain regime
• environmental and social reporting is mandatory but there is no guidance on disclosure levels and lack support from regulators
• speed of reporting is below regional regulatory best practice as only a quarter of large firms reported their audited annual financial results within 60 
days (average time was 75 days and the legal deadline is 90 days)
• minority shareholder protection is weak, they have little chance to request a general meeting, and disclosure requirements for directors and major 
shareholders are below best practices.
• rules related to price‐sensitive information are lagging, the definitions are vague, the deadline for disclosure is only two days, and woefully enforced
• related‐party transactions are loosely regulated with loopholes for insiders 
• notices of AGMs is a minimum of 15 days which is below the 28 day best practice. Administrative procedures required by regulators discourage 
companies from releasing detailed meeting agendas prior to AGMs
• voting disclosure is weak and poll voting is not mandatory
• unique split‐board structure (Dutch company law model) vaguely defines independence and leaves scope for manipulation by executive boards and 
controlling shareholders
• audit committees are typically not genuinely independent since the board of commissioners is not truly independent
• sustainability reporting is at an early stage and although mandated for SOEs, LLCs and natural resources entities, there is no guidance from regulators

↑ Enforcement (increased from 22% in 2012 to 24% in 2014)
• consensus from surveyed firms and the OJK regulator was that policing  and enforcement is weak and requires significant investment. There is also little 
evidence of major enforcement successes. To date the OJK’s enforcement has been on market oversight, monitoring RPT, and checking filing compliance
• much depends on political will and the availability of regulatory resources. OJK expects to be self‐funding in 2017
• although OJK is granted wide powers of supervision and investigation, it does not have power to prosecute cases including insider trading
• Small improvement with market enforcement with shareholder engagement increasing slightly yet most institutional investors have no expectation that 
they can overturn resolutions

Source ‐ “CG Watch 2014 – Market Rankings”, 2014, Asian Corporate Governance Association

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Indonesia Market Rankings and Scores 2014 Issues, ACGA cont. 
↑ Political and Regulatory (increased from 33% in 2012 to 44% in 2014)
• it will be a key challenge when the new levy system is implemented in 2017 and OJK will need to operate independently. The potential for political 
meddling is high with the board of commissioners appointed by the government
• new rule making has not been impressive since 2012, however the introduction of the CG Roadmap will lead to more significant rule introductions by 
both the OJK and the IDX
• there are challenges in tackling serious corruption issues in the political and regulatory arena, including the judicial system
• media report on graft cases and CG scandals impartially

↔ Accounting and Auditing (IGAAP) (constant at 62% for 2012 and 2014)
• the auditing of smaller firms is not in line with international standards of auditing (ISAs)
• weak disclosure of audit and non‐audit fees earned by auditors
• there is a lack of audit and CPA professionals, and firms are understaffed and under‐resourced
• to meet rotation requirements, firms regularly change their name and appoint new partners to enable them to qualify as a new audit firm, all done by 
the book with knowledge from the Ministry of Finance
• the audit oversight and supervisory system is fragmented and understaffed. They aim to inspect 50 firms a year, and there were 394 CPA firms at the 
end of 2013

↓ CG Culture (decreased from 33% in 2012 to 32% in 2014)
• CG is principally a compliance‐driven process with little evidence of CG reform or initiatives that are not mandated or regulated somehow
• listed firms generally report CG on issues because they were told to do so
• poor CG disclosure prevails and most accounts reviewed had basic and formulaic descriptions of risk management, internal controls, and policies 
relating to remuneration and board evaluation
• separating the chair from the CEO remains an issue. Firms claim that since they have a president commissioner (equivalent to a chairperson) and a 
president director (CEO), the roles are split. In practice there is seldom a real division in their roles.
• voting by poll is partially practiced as most companies adopt an “open dissenting vote” policy
• few companies make detailed announcements in tabular form nor offer full disclosure of AGM voting results

Source ‐ “CG Watch 2014 – Market Rankings”, 2014, Asian Corporate Governance Association

Implementation of a CG program
Key steps

1 2 3
Decide on the Board structure, size  Define reporting lines and 
Decide on Board committees
and composition governance structure

4 5 6
Define Terms of Reference for  Bringing it all together: Drafting the 
Boards, Committees, members Define control mechanisms policies

Implementation: socialization and 
training

Periodic review mechanism

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1.   Board structure and composition

Board size
• Overall effectiveness of boards, outside a quite narrow range, tends to vary inversely with its size
• “Ideal” size depends on company size, stage of development, committees to be constituted, etc.
• Larger boards are less manageable, and the larger size inevitably inhibits the ability of individual members
to contribute
• Factors for determining size of Boards: Nature and scope of the business, organizational structure, etc.

Board composition
• Regulatory requirements mandate composition of boards (independence/non‐affiliation, etc.)
• Financial literacy/expertise on Boards is a necessity:
• Given the Board’s involvement in risk issues etc.
• Owing to the need to run an Audit Cte
• The key factor is the balance between insiders/owners and what is called independent professionals
• Qualification should be a driving criteria

2. Board committees

Current regulations for PLCs require two committees (03 for banks)

Audit Committee N&R Committee (Risk Committee)

Other possible Board Committees

CG Committee Investment Committee Strategy Committee

CSR Committee Human Resources Committee Ethics Committee

IT Steering Committee

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2.   Streamlining committee structure

• Develop the committees based on a blank‐slate approach

• Identify key committees required level of hierarchy (Board or Management level)

• Document clear mandates/charters for committees

• Identify primary roles and responsibilities and reporting lines
• Document a formal communication process
• Identify internal and external linkages for the committees
• Make the functioning more efficient by deciding on nature: ad hoc or permanent committees
• Embed activities handled informally or by individual members into decision making processes
• Reduce logistical burden of committees (e.g., regular formal meetings, membership bloat, etc.) but
make meeting frequency default quarterly

3.   Define reporting lines – Governance structure

The reporting lines should be defined keeping in mind prudent practices that foster independence
of the Board and of the control functions at the bank. An example structure has been shown below
Reporting lines should foster 
BoC
independence of the Board and of the 
control functions
Audit Committee
N&R Committee Chief Internal Auditor
External Audit Senior Partner
Compliance Officer

Structure/governing body
Not a member, but attending BoD
Full voting members

Risk Mgt Committee Strategy/Investment Committee

CRO, CEO, CTO, etc. CFO, CEO, COO, CTO, etc.

10
 4.   Define Terms of Reference

• The Company should define the roles and responsibilities of the Boards and individual members

• Some of the vital areas to be defined are:

Terms of Reference Board Committee
Mandate
Constitution
Membership/ Composition
Independence
Meeting frequency
Quorum
Tenure
Voting rights
Qualifications
Performance evaluation

5.   Define control mechanisms

• In general, companies have three vital control functions: Internal audit, Risk management
department and the Compliance unit
• Roles and responsibilities, reporting lines of these control functions to be clearly articulated
• Key consideration: Control functions should be independent from business lines
• Interactions between key control functions to be defined

• Some core areas of involvement of the control functions have been detailed below:

Internal audit Risk management dept. Compliance

• Identifies potential risks to the
business
• Independent assessment of the
efficacy of policies, procedures and
control mechanisms
• Reviews established processes and
proposes improvements
• Carries out ad‐hoc appraisals,
reviews
• Drafts risk policies and procedures; • Formulation of compliance
develop risk management standards
standards • Developing a compliance checklist
• Monitors the overall risk profile of • Conducting adequate checks to
the company ensure legal, regulatory and
• Supports the organization risk internal compliance
culture through development of a • Recommending range of corrective
common risk language actions
• Develops and presents reports on
aggregate risk profile

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6.   Develop CG policies (CG Manual)

A Corporate Governance Manual which will act as the base governing document for defining the
CG policies and procedures and monitoring the governance practices of the company

Some of the key areas to be covered under the CG Manual:

Board Structure, Size and Composition

• Board structure, desired/maximum Board size members
• Required skill set and expertise of Board members • Independence policy – Criteria for independence
• Qualifications/Disqualification criteria for Board  • Board roles and responsibilities

Board Roles & Duties
• Director/Commissioner duties • Respective roles in setting long term strategy and 
• Separation of powers between BoC/BoD risk appetite
• BoC oversight role

6. Develop CG policies (CG Manual)

Board meetings
• Minimum number of Board meetings • Documentation of meeting minutes – Board 
• Documentation of attendance Secretary’s responsibility 
• Deciding the Board agenda
Board responsibilities
• Succession planning • Director compensation
• Evaluation of the BoD performance • Reviewing and approving significant transactions
• Expectation
• Time commitment • Other directorships and significant activities
• Contribution in Board meetings • Confidentiality
Board committees
• Board committees – Size and composition • Roles and responsibilities
• Reporting lines • Quorum, meeting frequency, voting rights etc.
• Other areas
• Board training and performance assessment • Policy for handling Conflict of Interest
• Code of Conduct and Code of Ethics • Relationship with control functions

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6. Develop CG policies (CG Manual)

Other Policies
• Remuneration policy setting criteria and principles for setting BoD/BoC (and senior management) 
remuneration, including KPIs for executives
• Dividend policy defining criteria for calculating, declaring and disbursing dividends
• Whistleblower policy, Code of Conduct or Business Ethics
• RPTs policy defining and setting RPTs identification, requesting disclosure of interests monitoring, approval 
and disclosure processes
• …

Policies are meant for internal use, but some policies such as Code of Conduct, RPT, whistleblower can be
disclosed to shareholders and public

Trouble shooting guide

Symptoms Cause Possible solutions

Build the business case for CG with the Chairmen/board
members
Insufficient knowledge of Ensure CG is an important discussion item on the Board
Corporate governance. Its agenda
implications are not fully Provide background documentation to BoC to educate
understood
Conduct formal trainings for BoD/BoC
Assign responsibility of induction to Board Secretary
Lack of interest in  Establish quick‐wins first to ensure stakeholder buy‐in. 
Corporate  Obvious steps such as constitution of Audit committee to be 
governance Changes in Corporate  done first
governance are viewed as 
a threat by commissioners  Handle sensitive issues by developing an action plan to ensure
or directors smooth transition

Sensitize Board and Executives to governance issues
Clear documentation of policies & procedures – Code, bylaws
Uncertainty about 
response to Governance Communication mechanisms, formal training sessions
issues
Establish a CG working group or task force to consider CG

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Trouble shooting guide

Symptoms Cause Possible solutions

Explain the benefits of having independent commissioners
Company unclear 
Legacy, block shareholding Explain the regulatory and legal requirements of CG
about 
patterns
independence Ensuring independence eliminates conflicts of interest and is
in the best interest of the company
Independent commissioners must pressure the BoC to be
BoC not involved in involved in strategy discussion/setting
strategy discussions
Replace the executives/Directors who still resist
BoC unclear about 
strategy/risk or  Place limits on other Board membership in the CG Manual
oversight role Lack of bandwidth – Time  Include minimum time commitment, and minimum
or qualification to  attendance requirements in appointment letters
discuss/set strategy 
Include minimum qualification – technical and functional,
criteria for Board members

Problems in  Internal CG stakeholders  Independent commissioners should alert the Chairman of the 

implementing CG have their own agendas BoC, in turn, the BoC to ensure and/or take action

Trouble shooting guide

Symptoms Cause Possible solutions

BoC should clearly question the management and seek hard
facts. They should take necessary actions if the trend is not
BoD is trying to hide poor corrected
BoC is not being  performance BoC (or independent members of BoC, or Audit Committee)
appraised of the 
should have Independent sessions with CRO or Control
true facts when BoD
functions to understand the vital areas of concern
reports to them
Board may have given an  Assertion by the Board to BoD/Senior management that they
impression that it  require accurate, adequate and timely disclosures to fulfill
welcomes only good news their duties

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