Anti-Corruption and Good Corporate Governance in Doing Business
Anti-Corruption
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.
Subjects of Law No. 31/1999
Source: Law No. 31/1999
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Civil Servants
Civil servants, as prescribed in Article 1 (2) Law No. 31/1999, are those that fall within the following classification:
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civil servants as referred to in Law on Manpower;
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civil servants as referred to in the Criminal Code;
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a person that receives a salary or wage from the state finance or regional finance;
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a person that receives a salary from a corporation that receives assistance from state finance or regional finance; or
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a person that receives a salary or wage from other corporations that use capital or facilities from the state or the people.
It is worth pointing out that in consideration of point (5) above, certain corporate employees are also deemed as civil servants if they are compensated or facilitated by state funds, regardless of the fact that the corporation is state-owned, regional-owned or not.
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State Apparatus
State apparatus are subject to certain criminal acts in Law No. 31/1999. By the definition aligned with Law No. 28/1999, state apparatus are state officials that 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:
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state officials in the highest state institution;
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state officials in the high state institutions;
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ministers;
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governors;
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judges;
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other state officials under the prevailing laws and regulations; and
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other officials having strategic functions in relation to the state apparatus under the prevailing laws and regulations.
The phrase ‘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 relate to carrying out state administration who are vulnerable towards corruption, collusion, and nepotism practices, which encompasses the following positions:
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BoD, BoC, and other structural officials in BUMN and BUMD ;
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The management of BI and management of Indonesian Bank Restructuring Agency;
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The management of state higher education;
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echelon I officials and other equivalent officials in the civil, military, and state police circle;
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prosecutors;
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investigators;
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court registrars; and
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The project leader and treasurer.
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Corporations
Corporation is also a recognized legal subject of corruption, of which can be imposed with sanctions for any criminal acts. Corporation refers to 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 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 cause financial state loss and fulfill the cumulative elements of corruption.
1. Corporations that are Financed by State Capital
There are two types of corporations that are financed by state capital: BUMN and BUMD. 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 refer to 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.
On the other hand, BUMD is a business entity whose capital is financed wholly, or mostly, by a region and 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 the APBD, of 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 allocated to state companies and regional companies, respectively, are categorized as state finances. 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 considered as a state financial loss. However, whether this particular 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 14.1.3 below.
2. Corporations that include Third Party Capital Based on Agreements with the State
Corporations that include third party capital based on agreements with the state are also liable to the criminal act of corruption. 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 aforementioned concept is a PPP transaction. PPP refers to a cooperation between the government and business entities, wherein all or part of the business entity's resources are utilized. This is conducted with consideration to the shared risk between the parties, of whom are bound to the agreement. In a PPP transaction, one of the parties is BUP, a limited liability company established by the contracting business entity that had won the project bid or was directly appointed by the government contracting party. The particular BUP takes the form of a 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 conduct a PPP project becomes the state finance, despite the BUP capital itself is not financed by the state. Therefore, the BUP can be classified as subject may be liable to the crime of corruption in the event that there is state financial loss, as well as proof of the fulfilment acts conducive to 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 upon the corporation or its management. The management is the corporate organ managing the corporation in question, done 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 committed by a corporation if the said crime is conducted by people within a working capacity or other relations, who act in the corporate environment, whether it may be individually or collectively.
In the circumstances where a lawsuit is filed against the corporation, the management will represent the corporation. The judge can summon the management of the corporation to the court, as well as order that the management to be brought to trial at court. Should there be such a case, the court will then issue a letter of summons to the domicile of the management or the office of the management. The main sentence that may be imposed on 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
Black’s Law Dictionary defines ‘corruption’ as a the vicious and fraudulent intention to evade the prohibitions of the law. More specifically, it refers to the act of an official or fiduciary person who unlawfully and wrongfully uses their station or character to procure some benefit for themselves, or for another person, of which is contrary to their duty and the rights of others. Nonetheless, the Indonesian legal framework does not provide a single definition of the criminal act of corruption – instead, it includes every criminal act stipulated in Article 2, Article 3, and Article 5 to Article 13 of Law No. 31/1999, summed into the following categories:
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acts causing state financial loss;
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bribery;
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embezzlement in connection with position;
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extortion;
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deceitful act;
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conflict of interest in procurement; and
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gratification.
The provisions and explanations regarding the abovementioned categories of the act of corruption is further elaborated below:
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Acts Causing State Financial Loss
1. Unlawful Acts of Self-Enrichment or Benefit of Others that Cause 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 creates losses to the state finance or state economy. A guilty partyis sentenced to life imprisonment or a minimum imprisonment of 4 (four) years, and to a maximum of 20 (twenty) years and can be fined up to a minimum of Rp200.000.000,- (two hundred million Rupiah) and up 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 conditions, the said person can be sentenced to life imprisonment. The elements encompassed by 'certain conditions' pertain to the circumstance that may result in more severe penalties. This occurs if the corruption is committed with funds that have been allocated to state-of-emergency countermeasures, national disasters, widespread social unrest, economic and monetary crises, and repeated corruption offences.
2. Abuse of Authority for Self-Enrichment or Enrichment of Others that Causes State Financial Loss
Article 3 of Law no.31/1999 outlines the penalties for individuals who, with the intent to enrich themselves or others, or the corporation, abuse their authority, resulting in losses to state finance or economy. This can be done through means of abusing their authority, available facilities or means at their disposal due to the position they hold. Offenders may face life imprisonment, imprisonment ranging from 1 to 20 years, of fines ranging from Rp 50,000,000 (minimum) to Rp 1,000,000,000 (maximum).
It is worth noting that the return of the losses back to state finance or state economy does not erase the crime and sentence toward toward the said perpetrator. Notwithstanding, returning the said the losses is deemed as a factor that may mitigate the sentence imposed.
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Bribery
According to recent findings, the practice of bribery is a prevailing issue that threatens business confidence and remains enticing to business actors who may conduct such crimes. Any person, including private entities, may be held criminally accountable and sanctioned for providing or receiving the bribe, as explained below:
1. Bribery in Relation to Civil Servants or State Apparatus
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Anyone who Maliciously Offers Something to persuade Civil Servants or State Apparatus
Based on Article 5 (1) Law No. 31/1999, the following acts shall be considered as bribery:
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giving or promising something to a civil servant or state apparatus with the aim of persuading them to or not to perform an action that violates their duties; or
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giving something to a civil servant or state apparatus in relation to any contrary act to his official duties, whether to or not to perform his duties,
Any violation shall be sentenced to a minimum of 1 (one) year of imprisonment and a maximum of 5 (five) years of imprisonment, and/or a fine with a minimum of Rp50.000.000,- (fifty million Rupiah) and a maximum of Rp250.000.000,- (two hundred and fifty million Rupiah). The sentence ]also applies to the civil servant or state apparatus who receives the payment or promise as referred to in point (i) or (ii) above.
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Anyone who Maliciously Offers Something to Civil Servant by considering its Power or Authority
According to Article 13 Law No. 31/1999, any person that gives gifts or promises to a civil servant by considering the power or authority attached in their 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).
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Civil Servants or State Apparatus Who Receive Bribery
Aside from the party that provides or promises something to the civil servant or state apparatus, the civil servant or state apparatus at the receiving end is also found accountable under Law No. 31/1999, which is explained in the table below:
Civil Servants or State Apparatus who Receive Bribery
Source: Law No. 31/1999.
2. Bribery in Relation to the Judge or the Advocate
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Anyone who Bribes the Judge or the Advocate
The term 'judge' refers to a judges in the Supreme Court and its subordinate courts across various domains, including general judiciary, religious judiciary, military judiciary, state administration judiciary, and judges in special courts falling under these jurisdictions.. Meanwhile, advocates are people whose profession is to provide legal services, both in and out of the court, meeting the requirements based on the provisions of Law No. 18/2003. Both judges and advocates are specifically regulated by Law No. 31/1999, particularlyrelating to the corruption crime of bribery. Pursuant to Article 6 (1) Law No. 31/1999, anyone that:
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gives or promises something to a judge with the aim of influencing the decision of the case examined case; or
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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 toa 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 on 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 14.1.2 above. Therefore, existing business actors and new business comers must prevent bribery practice from occuring in their companies.
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Judge or Advocate who Receives Bribery
According to Article 12 (c) and (d) of Law No. 31/1999:
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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
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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 a minimum sentence of 4 (four) years to a maximum sentence of 20 (twenty) years of imprisonment, and be fined a minimum of Rp200.000.000,- (two hundred million Rupiah) to a maximum of Rp1.000.000.000,- (one billion Rupiah).
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Embezzlement in connection with Position
Embezzlement in Connection with Position
Source: Law No. 31/1999.
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Extortion
According to Article 12 (e), (f), and (g) of Law No. 31/1999, a civil servant or state apparatus who:
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intentionally benefits themselves or other people in violation of law, or by abusing their power, forces a person to provide something, make a payment, or receive discounted payment, or to perform an action for thier own benefit ;
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during the execution of a task, requests, receives or deducts payment from other civil servants 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
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during the execution of a task, requests or receives a job or delivered goods from another party as if it were indebted to them,
shall be sentenced to life imprisonment or a minimum sentence of 4 (four) years to a maximum sentence 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).
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Deceitful Act
According to Article 7 (1) Law No. 31/1999, anyone that:
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is a building contract, building consultant, or seller of building materials who, during construction or the delivery of materials, engage in deceitful acts that may jeopardise the safety of people, goods, or the safety of the nation in the state of war;
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is a person(s) tasked with supervision of construction activities or the delivery of building materials who intentionally permits the aforementioned deceit as outlined in point (1);during the delivery of necessities to the national Defence Force, and/or the National Police commits a deceitful act that may endanger the safety of the nation in the state of war; or 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 to a maximum of 7 (seven) years of imprisonment and/or be fined a minimum of Rp100.000.000,- (one hundred million Rupiah) to a maximum of Rp350.000.000,- (three hundred and fifty million Rupiah). Such a sentence also applies to anyone who receives the delivery of aforementioned building materials, or the individual who receives the delivery of necessities for the National Armed Forces and/or the National Police, and allows the deceitful act to occur referred in point (1) or point (3) above.
Furthermore, pursuant to Art 12() of Law No.31/1999, a civil servant or state appartus who, at the time of performing their duties, uses state land of which land rights have already been granted to another party, presenting it as legally justified, thereby causing financial loss to the rightful party. Despite the action being unlawful they shall face a sentence of life imprisonment, or a minimum of 4 years imprisonment to a maximum of 20 years imprisonment. They will also be fined a minimum of Rp200.000.000,- (two hundred million Rupiah) and a maximum of Rp1.000.000.000,- (one billion Rupiah).
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Conflict of Interest in Procurement
Pursuant to Article 12 (i) Law No. 31/1999, a civil servant or state apparatus who intentionally, directly or indirectly, , participates in the chartering, procurement, or leasing, despite being assigned to arrange or supervise the activity in whole or in part, , shall be sentenced to life imprisonment or a minimum sentence of 4 (four) years and a maximum sentence of 20 (twenty) years imprisonment, and fined a minimum of Rp200.000.000,- (two hundred million Rupiah) to a maximum of Rp1.000.000.000,- (one billion Rupiah).
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Gratification
Gratification refers to the act of giving, in a broad sense, money, goods, discounts, compensation, interest-free loans, travel tickets, accomodation, tours, free medicine, and other facilities. Gratification in this sense covers matters that are received locally or from abroad, electronically or not. According to Article 12B (1) Law No. 31/1999, any gratification provided to a civil servant or state apparatus will be considered as a bribe, particularily when it is given due to their position, and goes against their obligations or tasks.
Provided that the gratification amounts to a total of Rp10.000.000,- (ten million Rupiah) or more, the recipient must 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 must prove that the gratification constitutes a bribe.
Furthermore, a civil servant or state apparatus who is found guilty of this criminal offense, as explained above, shall be sentenced to life imprisonment or a minimum of 4 (four) years of imprisonment to a maximum of 20 (twenty) years of imprisonment, and will be fined a minimum of Rp200.000.000,- (two hundred million Rupiah) to a maximum of Rp1.000.000.000,- (one billion Rupiah).
However, such provisions will become void if the recipient reports the gratification to the Corruption Eradication Commission. According to Article 12C (1) Law No. 31/1999, the recipient of the gratification must submit the particular report no later than 30 (thirty) working days after the gratification has been received. The Corruption Eradication Commission shall decide whether the gratification will belong to the recipient or the state, done within a period of 30 (thirty) working days at the latest after the receipt date of the report.
Good Corporate Governance
GCG is a set of basic business principles that covers different matters, including the establishment of a proper working relationship between the organs of a company and its stakeholders, creating a firm risk management strategy, and nurturing sustainable and ethical corporate culture. Its implementation is also closely linked to corporate sustainability, corporate responsibility, or ethical corporate governance.
However, GCG is to be distinguished from corporate law. Corporate law is the legal basis that establishes the skeleton of the company, whereas corporate governance refers to the operating system of the company which breathes the skeleton to life. No matter how elaborate the skeleton of a company may be, it still requires a firm operating system via GCG.
Purpose of Good Corporate Governance
GCG is a derision from the classic norm of corporate governance, of which is ‘Shareholder Primacy,’. This traditional norm priorities profit maximisation over employee welfare, environmental safety, or business ethics. GCG principles attempt to introduce sustainability principles and to reform/reshape this governance norm. Generally, GCG has two working dimensions: internally, it focuses on establishing a clear structure between shareholders and company management, ensuring the rights of each are protected and fulfilling the obligations of each party; and externally, it encourages companies to contribute to the general welfare of society through CSR schemes.
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Internal Dimension
The internal dimensions of GCG concerns itself with the protection of shareholders’ rights. This is as it seeks to prevent principal-agent problems, which refers to the conflict of interest between shareholders – as principal, and executive directors – as agents. This is because GCG attempts to clearly defines the powers and obligations of corporate organs , including the GMS, BoD, and BoC. GCG also pays attention to employees and their wellbeing through principles of equality of opportunity and non-discrimination. Most importantly, GCG's main internal goal is to ensure that there is proper internal risk management and legal compliance in every business and administrative decision that is conducted in order to prevent illegal misconducts, which could be fatal to the company’s sustainability and longevity.
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External Dimension (CSR)
Another dimension that is present through the promotion of GCG principles is CSR. While it is not wrong to assume that profit and shareholders’ interests are the main driving force of companies, there is also now an increased pressure that companies consider corporate social and environmental impacts. This is particularly applicable for larger companies. In the general elucidation of Law No. 40/2007, it is stated that the Indonesian economy is to be built upon “economic democracy” which rests upon the principles of solidarity, fairness 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 actualise this vision.
Principles of Good Corporate Governance
The principles of GCG emerged as an extension to the traditional corporate governance, integrating “good” principles to enhance efficiency, structure, sustainability and ethical standards.
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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, introducing 5 (five) main principles of GCG:
1. Transparency
This principle entails the timely, sufficient, clear, accurate, comparable, and accessible provision of information concerning the corporation to stakeholders. Such information includes, but is not limited to, the financial report, the list of controlling and minority shareholders, executive shareholders, internal control and audit system, GCG and compliance system, and any events which could majorly influence the corporation.
2. Accountability
This principle compels corporations to be operated correctly and in a scaled manner, in accordance with the interest of the company, whilst also considering the interest of shareholders and other stakeholders. Accountability refers to 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. The internal control system, in the form of a reward and punishment system and compliance with the code of conduct is one of the ways to achieve accountability.
3. 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.
4. 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.
5. 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.
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Regulation of Minister of State-Owned Enterprises
Another example, though applicable only to BUMN, is in MoSOE Reg. No. 02/2023. Under which, the principles of GCG mirrors those of the NCGP elaborated in Section 14.2.2 above, however with alterations to the definitions which can be seen below:
1. 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.
2. Accountability
This principle entails the defined functions, performance, and accountability of company organs, in order to establish an efficient company operation.
3. Responsibility
This principle entails the adherence of company operation to the laws and regulations and principles of GCG.
4. 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.
5. 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:
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the protection of rights of shareholders within and beyond the GMS;
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the tasks, responsibilities, composition, assessment, and limitations of the BoC;
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the tasks, responsibilities composition, assessment, and limitations of the BoD;
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risk management;
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internal control system;
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external audit;
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access, disclosure, and confidentiality of information;
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safety of workspace and working environment;
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respect toward stakeholders;
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business ethics, anti-corruption, and donation;
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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 the bylaws. However, it is nonetheless legally expected for public companies to introduce and implement GCG principles within the bylaws. A few examples of laws and regulations imposing the obligation to implement GCG and CSR in public companies are:
Object and Purpose of Anti-Corruption
Law No. 31/1999 was enacted to efficiently prevent and eradicate all forms of corruption that result in losses to the state finance or state economy. State finances encompass all state assets, whether separated or not separated, including all assets and rights and obligations arising from:
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being under the control of, management, and accountability of state agency officials, both at the central and regional levels;
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being under 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 refers to an economy organized as a collective endeavor based upon the principle of the family system, or as an independent community- endeavor based on government policies, both at the central and regional levels. This organization is 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
Article 1 (3) Law No. 31/1999 defines the term “anyone” as individuals and corporations, meaning that both natural persons and legal persons fall within the ambit of Law No. 31/1999 regulation. The provision further classifies certain individuals, namely civil servants and state apparatus. In brief, the general illustration of the legal subjects in Law No. 31/1999 can be seen in the diagram below:
Subjects of Law No. 31/1999
Source: Law No. 31/1999.
Regulatory Obligations to Implement GCG
Source: Law No. 40/2007, Law No. 25/2007, and BKPM Reg. No. 5/2021.
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. 02/2023, 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 the responsibility to “perform social and environmental responsibility”. However, there is no prescribed form of CSR that must be followed by companies. The 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”. GR No. 47/2012 regulates the performance of CSR as follows:
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The CSR plan shall be included and accounted in the company budget, the process of which is subjected to principles of propriety and reasonableness.
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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.
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The performance of CSR shall be included in the yearly business report of the company and accounted for in the yearly general meeting.
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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:
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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.
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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:
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The first line of defense is the operational management or front office, which spearheaded the business operation of the company.
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The second line of defense is divisions such as legal, finance, internal risk manager, to ensure compliance and support the first line of defense.
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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:
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Consequences towards the Company
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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.
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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.
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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.
