Anti-Corruption and Good Corporate Governance in Doing Business

- 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 a 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 a 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 that:

​

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 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 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).

​

- Gratification

​

Gratification means the act of giving in a broad sense, including money, goods, discount, recompense, interest-free loan, travel ticket, lodging, tour, free medicine, and other facilities. Gratification in this sense covers that received locally or from abroad, electronically or not. 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, the recipient 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 constitutes as 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. According to Article 12C (1) Law No. 31/1999, 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

​

GCG is a set of basic business principles that covers different matters, i.a., 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. Its implementation is also adjacent 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 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 via GCG.
 

Purpose of Good Corporate Governance

​

GCG derives from the classic norm of corporate governance, 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, GCG has two working dimensions: internal with the main concern to establish a clear structure between shareholders and company management, ensuring the rights of each are protected, and obligations performed;  and external that pushes companies to contribute to the general welfare of society through CSR schemes.

​

Internal Dimension

​

The internal dimension of GCG concerns the protection of shareholders’ rights as it seeks to prevent principal-agent problem, which is the conflict of interest between shareholders – as principal, and executive directors – as agents. This is because GCG attempts to delineate the powers and obligations of corporate organs clearly, including for 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 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 more efficient, structured, as well as 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 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 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:

​

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 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:

​

• The CSR plan shall be included and accounted in the 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.

• 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.

​