On 17th November 2015, the Indonesian Financial Services Authority (Otoritas Jasa Keuangan, or OJK") (i) enacted a rule on the implementation of public companies' corporate governance guidelines and (ii) issued a circular letter attaching the public companies' corporate governance guidelines implemented under the rule, which set a new standard of corporate governance practice for public companies. Both were only published on OJK's website in early January 2016. These are issued as part of OJK's efforts to improve corporate governance in public companies and implement its recommendations in its Indonesian Corporate Governance Roadmap (Tata Kelola Perusahaan Indonesia) (which was issued in February 2014).
Under OJK Rule No. 21/POJK.04/2015 on the Implementation of Public Companies' Corporate Governance Guidelines ("Corporate Governance Rule") and OJK Circular Letter No. 32/SEOJK.04/2015 on Public Companies' Corporate Governance Guidelines ("Corporate Governance Guidelines"), OJK implements a "comply or explain" approach, where public companies are required to implement OJK's recommendations under the Corporate Governance Guidelines or, if any of these recommendations have not been implemented, disclose in their annual reports (i) the reason for not implementing OJK's recommendations and (ii) any alternative actions taken in place of OJK's recommendations.
Implications for Public Companies
The primary implication of the Corporate Governance Rule and the Corporate Governance Guidelines for public companies is that there is now a legal requirement to improve their corporate governance. If they do not meet this increased corporate governance standard, public companies will be required to disclose the reason for this non compliance (and any alternative actions taken in place of this increased corporate governance standard) in their annual reports. Failure to make this disclosure may result in sanctions from OJK.
The Corporate Governance Rule and the Corporate Governance Guidelines became effective on 17th November 2015. But public companies are only required to disclose whether or not OJK's recommendations have been implemented starting from their annual reports for the period ending on 31st December 2016.
Unfortunately, neither the Corporate Governance Rule nor the Corporate Governance Guidelines provide any details on the level of disclosure that public companies must make in their annual reports both for implementing and for failing to meet OJK's recommendations. The Corporate Governance Guidelines only provide that if public companies fail to meet OJK's recommendations, the disclosure in the annual report needs to be sufficiently clear, informative and sufficient for investors and other stakeholders to understand the reason for not meeting OJK's recommendations. They also do not provide any detailed explanation of what OJK is expecting to be provided in the various policies that public companies are now required to have.
The Corporate Governance Rule imposes administrative sanctions on parties that violate (including parties that cause the violation of) the Corporate Governance Rule. These sanctions include fines. In addition, the Corporate Governance Rule provides that OJK may also carry out "certain actions" against violators of the Corporate Governance Rule. These include OJK delaying the issuance of an effective statement (e.g. for a merger or a rights issue).
What are OJK's Recommendations?
The following are OJK's recommendations under the Corporate Governance Guidelines:
- Recommendations to increase the value of general meetings of shareholders ("GMS"):
- Public companies should have technical procedures on voting in a GMS (both for an open and closed voting system) that protects shareholders' independence or freedom. An example given by OJK for an open voting system procedure is for shareholders to raise their hands in accordance with the voting options offered by the chairman of the GMS. For a closed voting system, which should be used for decisions that require anonymity or if requested by shareholders, an example given by OJK is to use voting cards or an electronic voting system.
- All members of the board of directors ("BOD") and board of commissioners ("BOC") should attend annual GMS.
- A summary of minutes of general meetings of shareholders should be made available in the public company's website for at least one year.
- To increase the quality of communications between public companies and their shareholders or investors, OJK recommends that public companies have a policy for communications ("Communications Policy") with their shareholders or investors. This policy may cover, among other things, the timing of any communications and a guideline that supports shareholders or investors in participating in these communications. The Communications Policy should be disclosed in the public company's website.
- Recommendations to strengthen the membership and composition of the BOC:
- The conditions of the public company should be considered in determining the number of BOC members. These conditions include the characteristics, capacity, size, goals and needs of the public company.
- The composition of the BOC should be determined by taking unto account the skills, knowledge and experience needed by the public company.
- Recommendations to increase the quality of the implementation of the BOC's duties and responsibilities:
- The BOC should have a self assessment policy to assess its performance. This assessment should be carried out by each member of the BOC. The BOC self assessment policy should be disclosed in the annual report.
- The BOC should have a policy for the resignation of BOC members if they have been found guilty of a financial crime.
- The BOC or the Nomination and Remuneration Committee (as applicable) should have a succession policy for BOD members.
- Recommendations to strengthen the membership and composition of the BOD:
- The conditions of the public company and the effectiveness in decision making should be considered in determining the number of BOD members. The conditions that need to be considered include the characteristics, capacity and size of the public company.
- The composition of the BOD should be determined by taking into account the skills, knowledge and experience needed by the public company.
- The BOD member that carries out the accounting or finance function should have skills or knowledge in accounting. This can be evidenced through educational background, training certification or work experience.
- Recommendations to increase the quality of the implementation of the BOD's duties and responsibilities:
- The BOD should have a self assessment policy to assess its performance. This assessment should be carried out by each member of the BOD. The BOD self assessment policy should be disclosed in the annual report.
- The BOD should have a policy for the resignation of BOD members if they have been found guilty of a financial crime.
- To increase corporate governance through the participation of stakeholders, OJK recommends that public companies have certain policies, including (i) a policy to prevent insider trading, (ii) an anticorruption and anti-fraud policy, (iii) a whistleblowing policy and (vi) a policy for giving long term incentives to members of the BOD and employees.
- Recommendations on disclosure:
- Public companies should use a broad range of information technology (in addition to their websites) as a means of making disclosures.
- Public companies should disclose in their annual reports the ultimate beneficial owners of their shareholders that hold 5% or more of their issued shares.
Issues that Require Further Clarity
As usual, it remains to be seen how the Corporate Governance Rule and the Corporate Governance Guidelines will be implemented in practice. But as for now, there are some issues that may require further clarity, including:
- The level of detail (including in what format) that OJK wants to see in the disclosures that public companies will be making in their annual reports (both for implementing and for failing to meet OJK's recommendations).
- The Corporate Governance Rule and the Corporate Governance Guidelines require public companies to have certain policies that were not previously required. It is unclear how rigidly OJK requires these policies to be implemented once they are established. It is also unclear how and whether OJK will monitor compliance with these policies (as not all policies need to be disclosed) and whether it will impose sanctions for breaching these policies.
- The Corporate Governance Rule and the Corporate Governance Guidelines impose a new standard of disclosure that was previously not required which requires the cooperation of minority shareholders for the standard to be met, e.g., disclosure of the ultimate beneficial owners of shareholders that hold 5% or more of the issued shares. It is unclear whether in the event of non compliance OJK would accept an argument that minority shareholders were not cooperative in providing the relevant information.
Conclusion
The Corporate Governance Rule and the Corporate Governance Guidelines set a new standard for public companies and their BOD and BOC members, requiring them to improve their corporate governance practice. Public companies and their BOD and BOC members should (i) ensure that these new corporate governance standards are met for the benefit of public companies (including their public shareholders) or (ii) if these standards cannot be met, disclose properly in their annual reports the reason for failing to meet this standard, to avoid OJK imposing sanctions or delaying transactions that require an effective statement from OJK.
Hadiputranto, Hadinoto & Partners, Member of Baker & McKenzie International - 11th January 2016