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Anti-Corruption and Good Corporate Governance in Doing Business in Indonesia

Anti-Corruption

 

Corruption is a global issue faced by all countries, governments, and communities, and Indonesia is no exception. Indonesia has consistently scored very low in the Corruption Perceptions Index issued by Transparency International. In 2020, Indonesia obtained a score of 37 (thirty-seven) in a range of 0 (zero) being “Highly Corrupt” to 100 (one hundred) being “Very Clean”, solidifying its rank at 102 against 180 countries.

 

Based on a compiled data obtained from Trading Economics which sources its material from Transparency International, the summary of Indonesia’s statistics on its Corruption Perception Index is as shown in the graph below:

Indonesia’s Corruption Perception Index in 10 (Ten) Years.png

Indonesia’s Corruption Perception Index in 10 (Ten) Years

Source: Trading Economics, Indonesia Corruption Index

It is important to note that the data and public perception on corruption contributes to determine business confidence, whereby corruption tends to reduce incentives to invest.  Considering that corruption is perceived as the norm in Indonesia, henceforth, the collective efforts to eradicate corruption is vital, which should not only be upheld by law enforcers, but also existing business actors and new business comers to ensure healthy business practices and boost business confidence.

 

In light of the above, the Indonesian government has set an anti-corruption framework, which is stipulated in Law No. 31/1999 which will be elaborated further in this section.

 

Aims of Anti-Corruption

 

Law No. 31/1999 was created with the expectation of being able to meet and anticipate the development of the legal needs of the community in order to prevent and eradicate more effectively every form of corruption causing losses to the state finance or state economy in particular and society in general.  State finances are all state assets in any form, whether separated or not separated, including all state assets and all rights and obligations arising from:

 

  • being in the control, management, and accountability of state agency officials, both at the central and regional levels;

  • being in the control, management, and accountability of BUMN/BUMD, foundations, legal entities, and corporations that are financed by state capital, or corporations that include third party capital based on agreements with the state.

 

Meanwhile, the state economy is the economy organized as collective endeavor based upon the principle of the family system or as independent community endeavor based on government policies, both at the central and regional levels in accordance with the provisions of the applicable laws and regulations aimed at providing benefits, prosperity, and welfare for all people's lives.

 

 

Subjects Regulated under Anti-Corruption Framework

 

In the provision set forth in Article 1 (3) Law No. 31/1999, it defines the term “anyone” refers to individuals and corporations, thereby the framework of Law No. 31/1999 is applicable to both natural persons and legal persons. It also further categorizes certain individuals who are subject to specified provisions thereof, namely civil servants and state apparatus. Further explanation will be provided regarding the said individuals, however the general illustration of subjects of Law No. 31/1999 can be seen in the diagram below:

Subjects of Law No. 31-1999.png

 Subjects of Law No. 31/1999

Source: Law No. 31/1999

Civil Servants

 

Civil servants as prescribed in Article 1 (2) Law No. 31/1999 are those that meet the classification as outlined below:

 

  1. civil servants as referred to in Law on Manpower;

  2. civil servants as referred to in the Criminal Code;

  3. a person that receives salary or wage from the state finance or regional finance;

  4. a person that receives salary from a corporation that receives assistance from state finance or regional finance; or

  5. a person that receives salary or wage from other corporations that use capital or facilities from the state or the people.

 

It is worth point out that in consideration of point (5) above, corporation employees are also deemed as civil servants in the event that they are compensated or facilitated by state funds, regardless of the fact that the corporation is state-owned, regional-owned or not.

 

State Apparatus

 

On top of civil servants, state apparatus are also subjects to certain criminal acts in Law No. 31/1999. The understanding of state apparatus is in line with the stipulation Law No. 28/1999, which defines state apparatus as state officials who carry out executive, legislative, or judicial functions and other officials whose main functions and duties are related to state administration in accordance with the provisions of the applicable laws and regulations. State officials that are deemed as state apparatus include:

 

  1. state officials in the highest state institution;

  2. state officials in the high state institutions;

  3. ministers;

  4. governors;

  5. judges;

  6. other state officials under the prevailing laws and regulations; and

  7. other officials having strategic functions in relation to the state apparatus under the prevailing laws and regulations.

 

Moreover, the category of other officials having strategic functions in relation to the state apparatus under the prevailing laws and regulations as mentioned in point (7) above refers to officials whose duties and authorities in carrying out state administration are vulnerable toward corruption, collusion, and nepotism practices, which encompasses the following positions:

 

  1. BoD, BoC, and other structural officials in BUMN and BUMD are state apparatus;

  2. management of BI and management of Indonesian Bank Restructuring Agency;

  3. management of state higher education;

  4. echelon I officials and other equivalent officials in the civil, military, and state police circle;

  5. prosecutor;

  6. investigator;

  7. court registrar; and

  8. Project Leader and Treasurer.

 

Corporations

 

In contrast to the preceding law, corporation is now recognized as a subject to the criminal act of corruption, which consequently may be imposed with sanction.  Corporation means an organized collection of people and/or wealth which may take the form of legal entities and non-legal entities.

 

Further, in line with the general elucidation of Law No. 31/1999 mentioned in Section 14.1.1 above, corporations that are financed by state capital (BUMN/BUMD) or corporations that include third party capital based on agreements with the state shall be considered to have committed criminal act of corruption in the event that they have caused state financial loss and fulfilled the other cumulative elements of corruption, which is elaborated further below:

 

1. Corporations that are Financed by State Capital

 

There are several corporations that are financed by state capital, such as BUMN and BUMD. By definition, BUMN is a business entity whose capital is financed wholly or mostly by the state through direct participation from separated state assets.  Separated state assets mean the separation of state assets from the APBN to be used as state capital participation in BUMN so that further developments and management is no longer based on the APBN system, but based on fair corporate principles.

 

Meanwhile, BUMD is business entity whose capital is financed wholly or mostly by the regions. One of the characteristics of BUMD is that all or most of its capital originates from separated regional assets. The concept of separated regional assets is similar to separated assets, however the source is from APBD, which is to be used as regional capital participation in BUMD.

 

Furthermore, it is important to understand that separated state assets and separated regional assets to state companies and regional companies respectively are categorized as state finance.  In account of the above, given that an act carried out by a BUMN or BUMD for its business activities cause losses to the company, the said loss is also considered as a state financial loss. However, whether the said act can be deemed as a criminal act of corruption depends on the fulfilment of the elements of corruption, which is explained further in Section 12.1.3 below.

 

2. Corporations that include Third Party Capital Based on Agreements with the State

 

Aside from corporations that are financed by state capital, corporations that include third party capital based on agreements with the state are subject to criminal act of corruption as well. This is related to the definition of state finance pursuant to Article 2 (h) and (i) Law No. 17/2003, which covers: (i) the assets of other parties controlled by the government for carrying out government duties and/or public interests; and (ii) the assets of other parties obtained using facilities provided by the government.

 

An example of the foregoing is PPP transaction. PPP is a cooperation between government and business entity, which uses all or part of the resources of the business entity by taking into account of the risk shared between the parties,  and bound by an agreement. In the PPP transaction, one of the parties is BUP, a limited liability company established by the contracting business entity who had won the bid or was directly appointed by the government contracting party.  The said BUP takes the form of private entity and carries out the financing of the PPP pursuant to Article 37 (1) of MoNDP No. 4/2015.

 

Based on the scheme above, the funds obtained by the BUP to carry out the cooperation with the government for PPP becomes the state finance, despite the BUP capital itself is not financed by the state. Ergo, the BUP can be classified as a subject to the crime of corruption in the event there is state financial loss as well as proof of the fulfilment of the cumulative elements of corruption, which is explained further in Section 14.1.3 below.

 

Moreover, in the event  that the criminal act of corruption is committed by or on behalf of a corporation, the lawsuit and the sentence can be imposed on the corporation or its management.  The management is the corporate organ carrying out the management of the corporation in question in accordance with the articles of association, including those who holds authority and participate in determining corporate policies that can be qualified as criminal acts of corruption.  The criminal act of corruption is considered to be committed by a corporation on the terms that the said crime is conducted by people under the basis of work relationship or other relations, who act in the corporate environment, whether individually or collectively.

 

In a circumstance where a lawsuit is imposed on the corporation, the management represents the corporation.  The judge can summon the management of the corporation to the court as well as order that the management be brought to trial to the court.  In the event that the lawsuit is imposed on the corporation, the court then submits the letter of summons to the domicile of the management or the office of the management.  The main sentence that may be imposed to a corporation is only a fine, with the provision that the maximum sentence may be increased by one-thirds.

General Scope of Criminal Act of Corruption

 

In a broad sense, Black’s Law Dictionary defines corruption as a vicious and fraudulent intention to evade the prohibitions of the law. More specifically, it is the act of an official or fiduciary person who unlawfully and wrongfully uses his station or character to procure some benefit for himself or for another person, contrary to duty and the rights of others. Nonetheless, the Indonesian legal framework does not provide a single definition of the criminal act of corruption, whereas it is understood as every criminal act stipulated in Article 2, Article 3, and Article 5 to Article 13 of Law No. 31/1999 which can be summed into the following categories:

 

  • acts causing state financial loss;

  • bribery;

  • embezzlement in connection with position;

  • extortion;

  • deceitful act;

  • conflict of interest in procurement; and

  • gratuity.

 

The provisions and explanations regarding the abovementioned categories of the criminal act of corruption is further elaborated below:

 

Acts Causing State Financial Loss

1. Act of Self-Enrichment that Causes State Financial Loss

 

According to Article 2 Law No. 31/1999, anyone who illegally commits an act to enrich oneself or another person or a corporation, thereby creating losses to the state finance or state economy, is sentenced to life imprisonment or minimum imprisonment of 4 (four) years and to a maximum of 20 (twenty) years, and fined to a minimum of Rp200.000.000,- (two hundred million Rupiah) and to a maximum of Rp1.000.000.000,- (one billion Rupiah).  Moreover, in the event that the said criminal act of corruption is committed under certain condition, the said person can be sentenced to life imprisonment.  The element of “certain condition” is the condition that may subsequently impose heavier punishment in the event the crime of corruption is conducted towards funds designated for states of emergency countermeasures, national disasters, widespread social unrest, economic and monetary crisis, and repetition of corruption offenses.

2. Act of Abusing Authority for Self-Enrichment that Causes State Financial Loss

 

According to Article 3 Law No. 31/1999, Anyone with the intention of enriching themselves or other persons or a corporation, abusing the authority, the facilities or other means at their disposal due to rank or position, thereby creating losses to the state finance or state economy, is sentenced to life imprisonment or minimum sentence of 1 (one) year and maximum sentence of 20 (twenty) years or the minimum fine of Rp50.000.000,- (fifty million Rupiah) and maximum fine of Rp1.000.000.000,- (one billion Rupiah). 

It is worth noting that returning the losses toward state finance or state economy does not erase the crime and sentence toward said perpetrator.  Notwithstanding, returning the said the losses is deemed as a factor that may ease the sentence imposed.

 

Bribery

 

Based on data compiled by Trading Economics obtained from Transparency International, Indonesia Bribery index was reported at 27.1% (twenty-seven point one percent) in 2015. Moreover, according to the TRACE Bribery Risk Matric which measures business bribery risk in 194 countries, territories, and autonomous and semi-autonomous regions, Indonesia in 2020 obtained a score of 44 (forty-four) in a range of 0 (zero) being “Very High” to 100 (one hundred) being “Very Low”, which puts its rank at 74 (seventy-four) amongst 194 (one hundred and ninety-four) countries. This leads to the fact that the practice or bribery is still an issue at hand, which could serve as a negative factor towards business confidence and entice business actors to conduct such crime as well.

 

Notwithstanding, anyone, including private entities, may be held accountable and be sanctioned on the grounds of providing or receiving the bribe. Further explanation on the subjects of bribery is provided below:

 

1. Bribery in Relation to Civil Servants or State Apparatus

 

- Anyone who Bribes the Civil Servants or the State Apparatus

 

Both civil servants and state apparatus are specifically regulated in Law No. 31/1999 as mentioned in Section 14.1.2 relating to the corruption crime of bribery. Based on Article 5 (1) Law No. 31/1999, anyone who:

 

  • gives or promises something to a civil servant or state apparatus with the aim of persuading them to perform an action or not to perform an action because of their position, which is in violation of their obligation; or

  • gives something to a civil servant or state apparatus because of or in relation to something, which is in violation of their obligation whether or not it is done because of their position,

 

shall be sentenced to a minimum of 1 (one) year of imprisonment and a maximum of 5 (five) years of imprisonment and/or be fined a minimum of Rp50.000.000,- (fifty million Rupiah) and a maximum of Rp250.000.000,- (two hundred and fifty million Rupiah). Such sentence also applies to the civil servant or state apparatus who receives payment or promise as referred to in point (i) or (ii) above.

 

- Anyone who Offers Gifts to Civil Servant

 

According to Article 13 Law No. 31/1999, anyone offering gifts or promises to a civil servant in consideration on the power or authority vested in the rank or position, or provider of gifts or promises is deemed to vest interests in the rank or position, shall be fined to a maximum of sentenced 3 (three) years and/or fined to a maximum of Rp150.000.000,- (one hundred fifty million Rupiah).

 

- Civil Servants or State Apparatus Who Receive Bribery

 

Aside from the party that provides or promise something to the civil servant or state apparatus, the civil servant or state apparatus as the receiving end are also accountable under Law No. 31/1999, which is explained in the table below:

Civil Servants or State Apparatus who Receive Bribery

Civil Servants or State Apparatus who Receive Bribery

Source: Law No. 31/1999.

2. Bribery in Relation to the Judge or the Advocate

- Anyone who Bribes the Judge or the Advocate

 

Judge is the judge in Supreme Court and its subordinate court within the scope of general judiciary, religious judiciary, military judiciary, state administration judiciary, and judge in special court within such scope of judiciary.  Meanwhile, advocates are persons whose profession are to provide legal services, both in and out of the court, who meet the requirements based on the provisions of Law No. 18/2003.  Both judges and advocates are specifically regulated in Law No. 31/1999 relating to the corruption crime of bribery. Pursuant to Article 6 (1) Law No. 31/1999, anyone that:

 

  • gives or promises something to a judge with the aim of influencing the decision of the case examined; or

  • gives or promises something to an individual who according to the laws and regulations is appointed as an advocate to attend a trial session with the aim of influencing the advice or views on the case examined,

 

shall be sentenced to a minimum of 3 (three) years of imprisonment and a maximum of 15 (fifteen) years of imprisonment and be fined a minimum of Rp150.000.000,- (one hundred and fifty million Rupiah) and a maximum of Rp750.000.000,- (seven hundred and fifty million Rupiah). Such sentence also applies to the judge or the advocate receiving the payment or promise as referred to in point (i) and point (ii).

 

In light of the above, the sanction of bribery practice, specifically in the form of bribing the judge or the advocate, does not solely apply to governments, but also to private actors as stated in Section 13.1.2 above. Therefore, existing business actors and new business comers must prevent bribery practice occurs in their companies.

- Judge or Advocate who Receives Bribery

According to Article 12 (c) and (d) Law No. 31/1999:

  • a judge that receives gifts or promises believed or reasonably suspected to have been given to influence the verdict of the case handed down to them for trial; or

  • an individual who according to the laws and regulations is determined to be an advocate to attend a trial court, then receives gifts or promises believed or reasonably suspected to have been given to influence the advice or view on the case referred to the court for trial,

shall be sentenced to life imprisonment or minimum sentence of 4 (four) years and maximum sentenced of 20 (twenty) years of imprisonment and be fined to a minimum of Rp200.000.000,- (two hundred million Rupiah) and to a maximum of Rp1.000.000.000,- (one billion Rupiah).

- Embezzlement in connection with Position

Embezzlement in Connection with Position

Embezzlement in Connection with Position

Source: Law No. 31/1999.

- Extortion

According to Article 12 (e), (f), and (g) Law No. 31/1999, a civil servant or state apparatus who:

  1. intentionally benefits themselves or other people in violation of law, or by abusing their power forces a person to give something, pay, or receive discounted payment, or to do something for themselves;

  2. at the time of performing task, requests, receives or cuts payment from other civil servant or state apparatus or from the general treasurer as if the other civil servant or state apparatus or the general treasurer is indebted to them; or

  3. at the time of performing task, requests or receives a job or delivered goods from other party as if it were indebted to them,

shall be sentenced to life imprisonment or minimum sentence of 4 (four) years and maximum sentenced of 20 (twenty) years of imprisonment and be fined to a minimum of Rp200.000.000,- (two hundred million Rupiah) and to a maximum of Rp1.000.000.000,- (one billion Rupiah).

- Deceitful Act

According to Article 7 (1) Law No. 31/1999, anyone who:

  1. is a building contractor, building consultant who at the time of building construction, or a seller of building materials who at the time of building material delivery commits a deceitful act that may endanger the safety of people or goods or the safety of the nation in the state of war;

  2. is a person(s) assigned to supervise construction activities or the delivery of building materials who intentionally allows the said deception referred in point (1);

  3. at the time of delivering necessities to the National Defense Forces and/or the National Police commits a deceitful act that may endanger the safety of the nation in the state of war; or

  4. is assigned to supervise the delivery of necessities to the National Defense Forces and/or the National Police who intentionally allows the deception referred in point (3),

shall be sentenced to a minimum of 2 (two) years of imprisonment and a maximum of 7 (seven) years of imprisonment and/or be fined a minimum of Rp100.000.000,- (one hundred million Rupiah) and a maximum of Rp350.000.000,- (three hundred and fifty million Rupiah). Such sentence also applies to anyone who receives the delivery of building materials or the individual who receives the delivery of necessities for the National Defense Forces and/or the National Police and allows the deceitful act to occur referred in point (1) or point (3) above.

Furthermore, pursuant to Article 12 (h) Law No. 31/1999, a civil servant or state apparatus who, at the time of performing their duties, uses state land which has already been granted land right to use to another party, as if it is justified by law, have caused loss to the party entitled to it, while in fact the action violates the law, shall be sentenced to life imprisonment or a minimum of 4 (four) years of imprisonment and a maximum of 20 (twenty) years of imprisonment and be fined minimum of Rp200.000.000,- (two hundred million Rupiah) and a maximum of Rp1.000.000.000,- (one billion Rupiah).

- Conflict of Interest in Procurement

Pursuant to Article 12 (i) Law No. 31/1999, a civil servant or state apparatus who directly or indirectly with intent, participate in chartering, procurement, or leasing, when in fact they were assigned to arrange or supervise in whole or in part at the time of the activity, shall be sentenced to life imprisonment or minimum sentence of 4 (four) years and maximum sentenced of 20 (twenty) years imprisonment and be fined to a minimum of Rp200.000.000,- (two hundred million Rupiah) and to a maximum of Rp1.000.000.000,- (one billion Rupiah).

- Gratuity

Gratification is payments or gifts in broad sense, including money, goods, discount, recompense, interest-free loan, travel ticket, lodging, tour, free medicine, and other facilities. Gratification includes the gratification received at home or from abroad and the gratification done using electronic device or not using electronic device.  According to Article 12B (1) Law No. 31/1999, any gratification for a civil servant or state apparatus shall be considered as a bribe when it has something to do with their position and is against their obligation or task.

Provided that the gratification amounts to Rp10.000.000,- (ten million Rupiah) or more, it is the recipient of the gratification who shall prove that the gratification is not a bribe. Whereas if the gratification amounts to less than Rp10.000.000,- (ten million Rupiah), it is the public prosecutor who shall prove that the gratification is a bribe.

Furthermore, a civil servant or state apparatus who is found guilty of the criminal offense as explained above shall be sentenced to life imprisonment or a minimum of 4 (four) years of imprisonment and a maximum of 20 (twenty) years of imprisonment and be fined a minimum of Rp200.000.000,- (two hundred million Rupiah) and a maximum of Rp1.000.000.000,- (one billion Rupiah). 

However, such provisions shall not be valid if the recipient reports the gratification to the Corruption Eradication Commission. The recipient of gratification shall convey the said report no later than 30 (thirty) working days after the gratification has been received. The Corruption Eradication Commission shall decide whether the gratification belongs to the recipient or the state within a period of 30 (thirty) working days at the latest after the receipt date of the report.
 

Good Corporate Governance

Generally, GCG is concerned with matters such as establishing a proper working relationship between organs of a company and its stakeholders, creating a firm risk management strategy, and nurturing sustainable and ethical corporate culture. It is also adjacent to concepts such as corporate sustainability, corporate responsibility, or ethical corporate governance. 

It is important to note that the concept of corporate governance is to be distinguished from corporate law; whereby corporate law establishes the skeleton of the company whereas corporate governance is the operating system of the company which breathes the skeleton to life. No matter how elaborate the skeleton of a company is, it still requires a firm operating system; a GCG.

 

Aims of Good Corporate Governance

GCG entails a set of principles which ensures efficient, sound, and organized corporate governance. It is a departure from the classic norm of corporate governance, which is Shareholder Primacy, which goal is to maximize profits in expense of employee welfare, environmental safety, or business ethics. GCG principles attempts to introduce sustainability principles and to reform this governance norm. Generally, it has two working dimensions: internal and external. For its internal aspect, the main concern of GCG is to establish a clear structure between shareholders and company management, ensuring the rights of each are protected, and obligations performed. As to its external aspect, GCG pushes companies to contribute to the general welfare of society through CSR schemes.

Internal Dimension

The internal dimension of GCG is concerned with the protection of shareholders rights as It seeks to prevent the principal-agent problem, which concerns the conflict of interest between shareholders – as principal, and executive directors – as agents. This is because GCG endeavors to delineate clearly the powers and obligations of corporate organs, including the GMS, the BoD, and the BoC. GCG also pays attention to employees and their wellbeing through principles of equality of opportunity and non-discrimination. Most importantly, GCG main internal goal is to ensure proper internal risk management and legal compliance in every business and administrative decision to prevent illegal misconducts, which could be fatal to the company’s sustainability and longevity.

External Dimension (CSR)

Another dimension that was added through the promotion of GCG principles is CSR. While it is not wrong to assume that profit and shareholders’ interest to be the main driving force of companies, it is also increasingly demanded that they take into account corporate social and environmental impacts, particularly for larger companies. In the general elucidation of Law No. 40/2007, it is stated that Indonesian economy is to be built upon “economic democracy which rests upon the principles of solidarity, fair and just efficiency, sustainability, environmental-friendly, independence, and to maintain the balance between progress and national economic unity with the aim to realize national welfare”. CSR is one of the ways to realize this vision.

Principles of Good Corporate Governance

The principles of GCG emerged essentially as an attachment to the ordinary corporate governance and added to it the “good” principles to make it not only more efficient and structured, but also sustainable and ethical.

The National Committee for Governance Policy

The NCGP has issued a GCG General Guidelines, which have been used and reaffirmed by many legal instruments in Indonesia, introduces 5 (five) main principles of GCG:

  • Transparency

This principle entails timely, sufficient, clear, accurate, comparable, and accessible provision of information concerning the corporation to the stakeholders. Such information includes, but not limited to, financial report, list of controlling and minority shareholders, executive shareholders, internal control and audit system, GCG and compliance system, and any events which could fatally influence the corporation.

  • Accountability

This principle compels corporations to be operated correctly and in a scaled manner, in accordance with the interest of the company, while also taking into account the interest of shareholders and other stakeholders. Accountability is essentially the ability of companies to account for their operation transparently and reasonably, which is the key to a sustainable operation. This entails clear structuring of company organs, each with their own tasks and roles. Internal control system in the form of reward and punishment system and compliance to code of conduct is one of the ways to achieve accountability.

  • Responsibility

This principle concerns companies’ external compliance with national laws and regulations, as well as to the most immediate community and environment of the company. CSR is part of this initiative, in order to boost legitimacy and acceptance from society as good corporate citizen.

  • Independency

It is crucial that each organ of a company functions independent of external influence to prevent conflict of interest or coercion of agenda other than that in the interest of the company. This also means each organ must remain within its legally permitted powers and obligations and not to overstep the boundaries and authority of other organs.

  • Fairness

Lastly, but also most importantly, companies have to sufficiently and consistently act fairly in account of all the competing interests between all stakeholders. Companies have to equitably treat stakeholders commensurate to their role and contribution to the company. Also as important, companies must create a fair and healthy environment for employee recruitment and development, free of discrimination based on race, gender, religion, and physical disability.

Regulation of Minister of State-Owned Enterprises

Another example, though applicable only to BUMN, is in MoSOE Reg. No. 01/2011. Under which, the principles of GCG mirrors those of the NCGP elaborated in Section 14.3.1 above, however with alterations to the definitions which can be seen below:

  • Transparency

This principle concerns the obligation for transparency throughout the chain of decision-making process in the company, as well as information disclosure regarding company operation.

  • Accountability

This principle entails the defined functions, performance, and accountability of company organs, in order to establish an efficient company operation.

  • Responsibility

This principle entails the adherence of company operation to the laws and regulations and principles of GCG.

  • Independency

This principle compels the independent operation of the company with professionalism and free from conflict of interest and exertion/influence from any party which are contrary to laws and regulations, and principles of GCG.

  • Fairness

This principle entails the just and equitable treatment of stakeholders which resulted in agreements or prescribed by laws and regulations.

Furthermore, these principles are to be applied throughout:

  1. the protection of rights of shareholders within and beyond the GMS;

  2. the tasks, responsibilities, composition, assessment, and limitations of the BoC;

  3. the tasks, responsibilities composition, assessment, and limitations of the BoD;

  4. risk management;

  5. internal control system;

  6. external audit;

  7. access, disclosure, and confidentiality of information;

  8. safety of workspace and working environment;

  9. respect toward stakeholders;

  10. business ethics, anti-corruption, and donation;

  11. GCG implementation assessment.

Regulatory Obligations to Implement GCG

For publicly listed companies, the relevant principles of GCG are not found in laws and regulations but are usually found in company bylaws. However, it is nonetheless legally expected for public companies to introduce GCG principles within the company through company bylaws. A few examples of laws and regulations imposing the obligation to implement GCG and CSR in public companies are:

  1. Elucidation of Article 4 Law No. 40/2007 : This provision denotes that the implementation of Law No. 40/2007 “does not diminish the obligation for companies to implement” other principles such as GCG within the management of limited liability companies.

  2. Article 15 Law No. Law No. 25/2007 : This provision imposes the obligation towards investors to implement GCG in their business operations.

  3. Article 5 (2) BKPM Reg. No. BKPM Reg. No. 5/2021 : This provision imposes the obligations towards business actors – which includes individual business, local and foreign business entity, and representative office of foreign company – to implement GCG in their management and perform CSR.

Furthermore, Law No. 40/2007 had established the standard structure of public companies, which is a three-tiered system consisting of the GMS as the principal of the company, BoC as independent overseers or representatives of the principal, and BoD as the agent or executive management, which every company in Indonesia has to follow. The addition of BoC functions to supervise and advice the executive directors without interfering, which helps to reduce one of the issues of corporate governance: (i) the principal-agent problem; or (ii) the shareholder-director conflict of interest. Therefore, this prescription of company structure is an inseparable part of the regulatory framework to facilitate the implementation of GCG principles. 

In conclusion, the regulatory framework imposing the implementation GCG, particularly for public companies, are of obligatory nature. From the obligations enshrined under Law No. 40/2007, Law No. 25/2007, and MoSOE Reg. No. 01/2011, even though it is applicable only to BUMN, we can observe that Indonesia seeks to nurture GCG through its regulatory framework.
 

Corporate Social Responsibility as part of GCG

Under GR No. 47/2012, all companies have a responsibility to “perform Social and Environmental Responsibility”. However, there is no prescribed form of CSR that must be followed by companies. The underlying purpose of CSR is to “increase the quality of life and environment that is beneficial to the local population and to the public welfare in general”. A particular emphasis on CSR performance is also directed towards companies operating within the sector, and/or involving and utilizing, of natural resources. Furthermore, it is in the best interest of companies to perform CSR obligations to develop a “harmonious, balanced, and in line with the environment, value, norms, and culture of the local population”.

Furthermore, GR No. 47/2012 regulates the performance of CSR as follows:

  • The CSR plan shall be included and accounted in company budget, the process of which is subjected to principles of propriety and reasonableness.

  • The performance of CSR shall be planned, budgeted, and carried out by the executive directors of the company and approved beforehand by board of commissioners or the general meeting. It shall be included in the yearly business plan and budget of the company.

  • The performance of CSR shall be included in the yearly business report of the company and accounted for in the yearly general meeting.

  • Incompliance with CSR obligation could be sanctioned in accordance with the prevailing laws and regulations.

The regulatory framework of CSR in Indonesia is quite clear and straightforward. Aside from the general procedure required for companies to follow in discharging their obligation to perform CSR, Indonesian laws and regulations give freedom to companies with regards to the form of CSR they wish to choose.

Other Business Principles and Theories

 

The sections that follow are the relevant business principles and theories which are relevant to the implementation of GCG in the context of Indonesian corporate and business landscape:

Principal-Agent Theory

One of the core issues that consistently show up in corporate governance is the issue of conflict of interest between shareholders and executive directors; a problem within the Principal-Agent theory. Principal-Agent theory is concerned with the dynamic between shareholders and executive directors of a company, particularly concerning their differing and competing interests. In theory, the actions contrary to shareholder interest taken by directors is called agency cost. In a shareholder-oriented company, this is an expense which has to be minimized. Through principles of accountability and independence, GCG seeks to balance and protect the directors in discharging their obligation to work in the interest of the company, without compromising and undermining the rights and influence of shareholders.

The Three Lines of Defense

Risk management is an inseparable part of GCG. The Three Lines of Defense is a management strategy to regulate and facilitate risk management system within a company, particularly in its chain decision-making process. The three lines of defense illustrates the three layers of different corporate divisions, from the front to the back, each with their own task of reduce and mitigate business and legal risks. There have been variations in nomenclature in different jurisdictions, but the general consensus of the three lines of defense is as follow:

  • The first line of defense is the operational management or front office, which spearheaded the business operation of the company.

  • The second line of defense is divisions such as legal, finance, internal risk manager, to ensure compliance and support the first line of defense.

  • The third line of defense is the internal audit which evaluates and highlights the efficacy and efficiency of the risk management system and other business conducts of the company.

Consequences of Non-Compliance to GCG

Since there are only minimum regulatory sanctions in place, it is important to consider the practical consequences as the undesirable outcome if GCG is not complied with. The said consequences can be outlined as follows:

Consequences towards the Company

  • Corporate Crimes: Aside from the deterrence of criminal punishment, GCG acts as a self-regulatory mechanism with a system of check and balances between company organs. Otherwise, companies are in danger of committing criminal acts. With reference to Section 13.3.1 above, the principles of CSR that can be utilized as a tool to prevent crimes are transparency, accountability, and responsibility, which are determinants to whether external obligations are fulfilled. Therefore, the adherence to the said principles may prevent corporations from conducting and being imposed sanctions for criminal acts considered as corporate crimes such as money laundering, tax evasion and corruption. For instance, cases of bribery as a form of corruption are pervasive, particularly the ones which involve public officials. According to the data provided by the Corruption Eradication Commission, since 2004, corruption cases in the category of bribery have consistently ranked first in the state, totaling to 750 (seven hundred and fifty) cases.

  • Regulatory Sanctions for Non-Compliance to CSR Obligations: Law No. 25/2007 on Investment stipulated that the failure to perform CSR will lead to: (i) written warning; (ii) imposed limits on business operations; (iii) freezing of business operation and/or investment facilities; and (iv) revocation of business and/or investment facility.

Consequences toward Consumers

Consumer rights protection in Indonesia is enforced under Law No. 8/1999. While GCG does not substantially cover consumer protection, the implementation of GCG in companies will influence the efficacy of consumer protection in Indonesia, particularly for businesses in the sector of service provision. One of the rights of consumers, for instance, is the “right to correct, clear, and honest information regarding the condition and guarantee of goods and/or services”. This right clearly requires the implementation of transparency principle promoted by GCG, which entails information honesty and disclosure.

 

Another consumer right is “the right to be treated or serviced properly, honestly and non-discriminatively” and “the right to obtain compensation, indemnity and/or replacement if the goods and/or services received are not in accordance with the agreement or not as it should be”. This right requires that companies implement the principles of accountability and responsibility. It illustrates how the implementation of the accountability and responsibility principles as part of GCG directly protect the consumers rights and prevent the infringements thereof. Based on the foregoing explanation, the implementation of GCG itself is a tool that is used to ensure consumers’ rights are not violated.