Corporate governance and directors' duties in Indonesia: overview

A Q&A guide to corporate governance law in Indonesia.

The Q&A gives a high level overview of board composition, the comply or explain approach, management rules and authority, directors’ duties and liabilities, transactions with directors and conflicts, company meetings, internal controls, accounts and audit, institutional investors and reform proposals.
To compare answers across multiple jurisdictions, visit the Corporate Governance Country Q&A tool.
The Q&A is part of the global guide to corporate governance law. For a full list of jurisdictional Q&As visit www.practicallaw.com/corpgov-mjg
Tony Budidjaja and Juni Dani, Budidjaja & Associates
Contents

Corporate governance trends

1. What are the main recent corporate governance trends and reform proposals in your jurisdiction?

Indonesia is taking significant steps toward improving corporate governance. The lessons learned from the Asian financial crisis of 1997 to 1998 and the global financial crisis of 2007 (which is still occurring) were critical in initiating these reforms. The desire to establish a strong corporate governance environment in the country in time for the planned launch of the Association of South East Asian Nations (ASEAN) Economic Community by 2015 is also sustaining momentum.

The reforms are articulated in the Indonesian Corporate Governance Roadmap (roadmap), which was launched in early 2014 by the Indonesia Financial Services Authority with the support of the World Bank's International Finance Corporation (IFC). The roadmap broadly seeks to achieve the following:

  • Strengthened supervisory role of company boards.

  • Improved quality of disclosure by companies (increased company transparency).

  • Greater protections for shareholders and stakeholders.

The recommendations in the roadmap can be summarised as follows:

  • Corporate governance framework: the enforcement of a code of good corporate governance through a "comply or explain" regime and the implementation of a code of conduct for stakeholders (such as capital market professionals, business journalists and other media).

  • Protection of shareholders: through transparent preparation, organisation and disclosure of results of the general meeting of shareholders and clearly defined dividend and voting rights.

  • Role of stakeholders (such as employees, vendors, and others): in the implementation of anti-corruption and procurement policies, and long-term incentives for employees. It also includes the roles and qualifications of corporate secretaries and implementation of whistleblower policies.

  • Transparency and disclosure: disclosure of ultimate ownership and disclosure of independence criteria for commissioners, as well as ensuring the availability of financial and non-financial information on companies' websites.

  • Role of boards: in the nomination and remuneration process of commissioners and directors. It also includes ensuring disclosure of qualifications of board members and providing orientation programmes for board members on their fiduciary duties. The role of boards should also extend to

    • tenure of commissioners;

    • promotion of board diversity;

    • evaluation of board performance; and

    • implementation of succession planning policies.

Under the roadmap. the recommendations should be implemented by June 2015. However, it is unlikely the recommendations will be fully implemented as scheduled.

The following regulations were recently enacted as part of the reform programme (under the roadmap) and demonstrate the commitment to improving corporate governance:

  • Indonesia Financial Services Authority Regulation No. 2/POJK.05/2014 dated 28 March 2014 on good corporate governance of insurance companies.

  • Indonesia Financial Services Authority Regulation No. 30/POJK.05/2014 dated 19 November 2014 on good corporate governance of financing companies.

  • Indonesia Financial Services Authority Regulation No. 32/POJK.04/2014 dated 8 December 2014 on planning and convening of the general meeting of shareholders for public companies.

  • Indonesia Financial Services Authority Regulation No. 33/POJK.04/2014 dated 8 December 2014 on board of directors, and board of commissioners of issuers and public companies.

  • Indonesia Financial Services Authority Regulation No. 34/POJK.04/2014 dated 8 December 2014 on committees of nomination and remuneration for issuers or public companies.

  • Indonesia Financial Services Authority Regulation No. 35/POJK.04/2014 dated 8 December 2014 on corporate secretary of issuers or public companies.

  • Indonesia Financial Services Authority Regulation No. 18/POJK.03/2014 dated 18 November 2014 on implementation of integrated corporate governance for financial conglomerates.

Other regulations in the process of being prepared include a regulation on guidelines of good corporate governance for public or listed companies.

The Indonesia Corporate Governance Manual (produced by IFC in cooperation with the Indonesia Financial Services Authority) complements the roadmap. It provides practical guidance for Indonesian companies on how to implement sound governance practices, for example, it explains the value and benefits of good corporate governance as well as benchmarking internationally recognised best practice and comparative practice in several countries against local laws, codes and regulations, and practices.

 

Corporate entities

2. What are the main forms of corporate entity used in your jurisdiction?

A limited liability company (known as Perseroan Terbatas) (PT) is the most commonly used for business in Indonesia. A PT can be in the form of a private limited liability company or a public limited liability company.

A PT must have at least two shareholders as well as a signed deed of establishment that is executed before a notary public and includes the company's articles of association. Once the deed of establishment is approved by the Minister of Law and Human Rights, the PT gains status as a legal entity with limited liability.

The three most common categories of PT are:

  • Wholly locally-owned PT.

  • Wholly or partially foreign-owned PT, categorised as a foreign investment company (PT Penanaman Modal Asing) (PT PMA).

  • PT that is majority or wholly owned by the Republic of Indonesia, categorised as a state-owned company or enterprise.

A public company has at least 300 shareholders and paid-up capital of at least IDR300 billion. A public company does not need to be listed on the Indonesian Stock Exchange.

Public companies that are listed on the Indonesian Stock Exchange must have a higher number of shareholders and higher paid-up capital, and are subject to stricter and more complex rules regarding their governance and disclosure.

A PT can voluntarily transform itself into a public company and vice-versa by following the requirements set out in Law No. 8 of 1995 on capital markets (Capital Markets Law) and its implementing regulations.

 

Legal framework

3. Outline the main corporate governance legislation and authorities that enforce it. How influential are institutional investors and other shareholder groups in monitoring and enforcing good corporate governance? List any such groups with significant influence in this area.

There is no single legislation or regulation covering the corporate governance field. Furthermore, there is no single regulatory body responsible for enforcing corporate governance. However, all Indonesian companies must comply with the corporate governance provisions prescribedin their articles of association and as set out in Law No. 40 of 2007 on limited liability companies (Company Law).

Companies must also comply with other laws and regulations governing the specific industry and activities in which they are engaged in business. For example, in addition to the Company Law, companies engaging in banking must comply with laws and regulations specific to banking activities such as:

  • Law No. 7 of 1992 on banking (as amended by Law No. 10 of 1998).

  • Law No. 8 of 1995 on capital markets (Capital Markets Law), if listed.

These laws and regulations can include corporate governance provisions.

Indonesian law requires public companies to observe and comply with corporate governance standards that are more stringent than those applied to private companies.

The legal and regulatory framework for corporate governance can be confusing. This may be attributed to the relatively young state of corporate governance in Indonesia. There have been dramatic improvements over the past five to seven years, although there is still much scope for greater clarification and consistency in the legal and regulatory framework, as well as improved implementation and adherence by companies. It is advised that companies seek legal advice about their corporate governance obligations.

The key laws and regulations applying to companies (in addition to the Company Law) are described in detail below.

Public and listed companies

Public and listed companies are regulated by the Indonesia Financial Services Authority and the Indonesian Stock Exchange. Public and listed companies must comply with Law No. 8 of 1995 on capital markets (Capital Markets Law) as well as regulations and rules issued by the Indonesia Financial Services Authority and the Indonesian Stock Exchange.

Financial services companies

Financial services companies are regulated by the Indonesia Financial Services Authority and include:

  • Banks.

  • Insurance companies.

  • Financing companies.

  • Securities companies.

  • Pension funds.

The key regulations applicable to companies in the field of financial services are the following:

  • Regulation of the Central Bank of Indonesia No. 8/4/PBI/2006 dated 30 January 2006 on implementation of good corporate governance for commercial banks.

  • Indonesia Financial Services Authority Regulation No. 2/POJK.05/2014 dated 28 March 2014 on good corporate governance of insurance companies.

  • Indonesia Financial Services Authority Regulation No. 30/POJK.05/2014 dated 19 November 2014 on good corporate governance of financing companies.

State-owned companies/enterprises

State-owned companies and enterprises are regulated by the Minister of State-owned Enterprises and line ministries for the relevant sectors. The key laws and regulations applicable to state-owned enterprises are:

  • Law No. 19 of 2003 on state-owned enterprises.

  • Regulation of Minister of State-owned Enterprises No. Per-01/MBU/2011 dated 1 August 2011 on implementation of good corporate governance of state-owned enterprises (as amended by Regulation of Minister of State-owned Enterprises No. Per-09/MBU/2012 dated 6 July 2012).

Limited liability companies (PTs) with foreign ownership (PT PMAs)

These companies are regulated by the Indonesia Investment Coordinating Board and the key regulations applicable to these investment companies are:

  • Law No. 25 of 2007 on capital investments.

  • Indonesia Investment Coordinating Board Regulation No. 3 of 2012 on guidelines and procedures for investment control and implementation.

 

Corporate governance codes

4. Has your jurisdiction adopted a corporate governance code?

Indonesia does not have a statutory corporate governance code. There is, however, a Code of Good Corporate Governance that was first issued in 2001 and revised in 2006 by the National Committee on Governance. The Code of Good Corporate Governance is a set of non-binding principles and benchmarks for all companies (private and public) in Indonesia. While the code itself is non-binding, it has informed the content of (legally binding) corporate governance regulations, established since 2006, for example, Regulation of the Central Bank of Indonesia No. 8/4/PBI/2006 dated 30 January 2006 on implementation of good corporate governance for commercial banks (see Question 1).

The Code of Good Corporate Governance covers the following main areas:

  • General principles of good corporate governance, for example, transparency, accountability, responsibility, independence and fairness.

  • Business ethics and code of conduct.

  • Functions of, and guidelines for, the general meeting of shareholders.

  • Functions of, and guidelines for, the board of directors for example, composition, requirements, functions, internal control, social responsibility and communication, risk management and accountability.

  • Functions of, and guidelines for, the board of commissioners, for example, composition, requirements, functions, accountability, and supporting committees such as an audit committee, a nomination and remuneration committee, a policy risk committee and a corporate governance policy committee.

  • The rights and responsibilities of shareholders.

  • The relationship between the company and non-shareholding stakeholders, for example, employees, business partners, the public and consumers.

As the Code of Good Corporate Governance is not mandatory but instead adopts a comply or explain approach, there are no direct consequences for failure to comply with the code. Publicly listed companies must usually disclose their corporate governance practices and give explanations in their annual reports.

 

Corporate social responsibility and reporting

5. Is it common for companies to report on social, environmental and ethical issues? Highlight, where relevant, any legal requirements or non-binding guidance/best practice on corporate social responsibility.

Indonesia may be considered as the first country to apply a mandatory approach to corporate social and environmental responsibility. Article 74 of Law No. 40 of 2007 on limited liability companies (Company Law) and its implementing regulation, Government Regulation No. 47 of 2012 on corporate social and environmental responsibility, require companies in the natural resources sector to fulfil corporate social and environmental responsibilities. They must disclose how they meet these responsibilities in their annual reports, which are tabled at the general meeting of shareholders.

There are a number of other regulations that require companies to implement and report on social, environmental and ethical issues, as follows:

  • Public or listed companies must submit a report on corporate social responsibility under the Capital Markets and Financial Institutions Supervisory Board Regulation No. X.K.6 on submission of annual reports by issuers or public companies. This can be done through the company's annual report. The Capital Markets and Financial Institutions Supervisory Board evolved into the Indonesia Financial Services Authority.

  • Private state-owned enterprises must implement an environmental program as well as a program to develop a small enterprise under the Minister of State-owned Enterprises Regulation No. Per-05/MBU/2007 on state-owned enterprises partnership program with small businesses and environmental development program (as amended, most recently by Minister of State-owned Enterprises Regulation No. Per-08/MBU/2013). The companies must report on these programs quarterly and annually to the Minister of State-owned Enterprises and to the company's general meeting of shareholders.

  • Limited liability companies (PTs) with foreign ownership (PT PMAs) must implement corporate social and environmental responsibility initiatives under Law No. 25 of 2007 on capital investment. Non-compliance can result in a warning letter, limitations on business activities, an order to cease business activities or investment facilities, or the revocation of its business or investment license.

In addition, the Minister of Social Affairs Regulation No. 13 of 2012 on corporate social responsibility forums for promoting social welfare, established a corporate social responsibility forum to promote social welfare. The main purpose of the forum is to co-ordinate, facilitate and collaborate with businesses, social organisations, universities, and societies on corporate social responsibility activities.

 

Board composition and restrictions

6. What is the management/board structure of a company?

Structure

An unlisted company must have the following governance (management) structure:

  • General meeting of shareholders.

  • Board of commissioners.

  • Board of directors.

The authority of the general meeting of shareholders is defined by Law No. 40 of 2007 on limited liability companies (Company Law), the articles of association of the company or both. The general meeting of shareholders:

  • Nominates and approves membership of the board of commissioners and board of directors.

  • Approves the annual report and the financial statements.

  • Approves the distribution of profits and losses (including the payment of dividends).

  • Approves amendments to the articles of association, re-organisation and dissolution including amendments to the company's authorised capital.

  • Approves extraordinary transactions.

The Company Law adopts a two board structure. The board of commissioners has a supervisory function while the board of directors has managerial or day-to-day operational responsibilities. The boards have equal status notwithstanding their different functions. The purpose of the two board structure is to enhance checks and balances.

For listed companies, the following governance (management) structure is required:

  • General meeting of shareholders.

  • Board of commissioners.

  • Board of directors.

  • Internal audit unit.

  • Audit committee.

  • Corporate secretary.

In addition, listed companies can establish the following (and other committees) at their discretion:

  • Risk policy committee.

  • Corporate governance committee.

  • Nomination and remuneration committee.

Management

The board of directors manages the day-to-day operations of the company. The board of directors is accountable to the general meeting of shareholders and its work is supervised or overseen by the board of commissioners. Law No. 40 of 2007 on limited liability companies (Company Law) and the company's articles of association regulate the authority of the board of directors, and the election and dismissal of its members.

Board members

The general meeting of shareholders nominates and approves membership of the board of commissioners and board of directors.

Only individuals can be appointed to the board of commissioners and board of directors.

Employees' representation

Employees (and trade unions) do not have the right to a representative on the board of commissioners or board of directors.

Number of directors or members

The general rule is that a limited liability company (PT) must have at least one director and one commissioner and there is no limit to the maximum number of directors and commissioners it can have.

However, there are additional requirements for certain specific sectors as follows:

  • Public and listed companies. Under Indonesia Financial Services Authority Regulation No. 33/POJK.04/2014 dated 8 December 2014 on board of directors and board of commissioners of issuers and public companies, public and listed companies must have a minimum of two directors (at least one independent) and two commissioners (at least 30% independent).

  • General commercial banks. Under Regulation of the Central Bank of Indonesia No. 8/4/PBI/2006 dated 30 January 2006 on implementation of good corporate governance for commercial banks, general commercial banks must have a minimum of three commissioners (at least 50% independent) and three directors (including the president director who also acts as an independent director and one compliance director).

  • Insurance companies. Under Indonesia Financial Services Authority Regulation No. 2/POJK.05/2014 dated 28 March 2014 on good corporate governance of insurance companies, insurance companies must have a minimum of three commissioners (at least 50% independent) and three directors.

  • Pooling and managing public funds and issuing acknowledgements of indebtedness to the public. A minimum of two directors and two commissioners is required to pool and manage public funds and issue acknowledgements of indebtedness to the public under Law No. 40 of 2007 on limited liability companies (Company Law).

 
7. Are there any general restrictions or requirements on the identity of directors?

Age

The company's articles of association can detail age restrictions for its directors and/or commissioners. The law does not prescribe age restrictions for directors or commissioners. However, a person can only be a director or a commissioner if he or she has the legal capacity to act or conduct legal actions. The Indonesian Civil Code provides that, unless proven otherwise, a person is deemed to be capable of undertaking legal actions if he or she is at least 21 years old, or under 21 years of age and married.

Nationality

Companies that are wholly owned by Indonesian shareholders cannot appoint foreign nationals to the board of commissioners. They can appoint foreigners to the board of directors, subject to certain conditions (such as there being no available Indonesian nationals with the requisite technical knowledge and skills for the role).

Limited liability companies (PTs) that are partially or wholly owned by foreigners (PT PMAs) have no nationality restrictions regarding members to their board of directors and board of commissioners, except for the human resources director position, which is reserved for Indonesian nationals.

Gender

There are no gender restrictions, quotas and/or gender disclosure requirements.

Other

Generally, a person cannot be appointed a director or a commissioner if, in five years before appointment, he or she was:

  • Declared bankrupt.

  • Declared to be at fault in causing the bankruptcy of the company while on its board of directors or board of commissioners.

  • Sentenced for a crime relating to the financial sector or caused losses relating to the state or the financial sector.

Regulations for specific fields of business or sectors may impose other forms of restrictions or requirements for directors and commissioners.

 
8. Are non-executive, supervisory or independent directors recognised or required?

Recognition

Non-executive directors are not recognised in Indonesia. All directors appointed by the general meeting of shareholders are considered executives with the authority to act on behalf of, and in the best interests of, the company.

The board of commissioners has a supervisory function and supervisory directors are recognised in this way.

Independent directors and commissioners are recognised and required in certain situations (see Question 6, Number of directors or members).

Board composition

See Question 6, Number of directors or members.

Independence

See Question 6, Number of directors or members.

Under the Indonesian Stock Exchange rules, an independent director of a listed company must not be:

  • Affiliated with the controlling shareholder of the listed company concerned at least six months before being appointed an independent director.

  • Affiliated with any commissioner or director of the listed company.

  • On the board of directors of any other public company.

  • An insider in a capital market supporting institution or profession whose service was engaged by the listed company at least six months before being appointed an independent director.

Under the Indonesia Financial Services Authority Regulation No. 33/2014, an independent commissioner of a public or listed company must not:

  • Work or have the authority and responsibility to arrange, lead, control or supervise the activities of the public or listed company concerned at least six months before, except for re-appointment as an independent commissioner of the company for the next period.

  • Hold direct or indirect shareholding in the listed or public company.

  • Have an affiliation with the listed or public company, including with its board of commissioners, board of directors or substantial shareholders.

  • Have a business relationship (directly or indirectly) with the listed or public company.

 
9. Are the roles of individual board members restricted?

A person cannot be appointed as a member of the board of directors and the board of commissioners simultaneously. It creates a conflict of interest situation because the duty of the board of commissioners is to supervise the board of directors.

A person who is a director in a public or listed company:

  • Can sit on no more than five committees of public or listed companies of which he or she sits on the board of directors or board of commissioners of those companies.

  • Can be director in no more than one other public or listed company.

  • Can be a commissioner in no more than three other public or listed companies.

A person who is a commissioner in a public or listed company:

  • Can sit on no more than five committees of public or listed companies of which he or she sits on the board of directors or board of commissioners of those companies.

  • Can be a director in no more than two other public or listed companies.

  • Can be a commissioner in no more than two other public or listed companies.

 
10. How are directors appointed and removed? Is shareholder approval required?

Appointment of directors

Members of the board of directors (and commissioners) are nominated and appointed by the general meeting of shareholders.

Removal of directors

Members of the board of directors (and commissioners) are discharged by a resolution of the general meeting of shareholders.

 
11. Are there any restrictions on a director's term of appointment?

There is no restriction on the term of appointment for directors (and commissioners) of private companies.

However, directors (and commissioners) of public or listed companies can only be appointed for a maximum of five years or until the closing of the annual general meeting of shareholders at the end of the five-year term. They can be re-appointed for the same period of time.

 

Directors' remuneration

12. Do directors have to be employees of the company? Can shareholders inspect directors' service contracts?

Directors employed by the company

Indonesian law does not require directors (or commissioners) of a company to be employees of the company.

Shareholders' inspection

The remuneration of directors is determined by the general meeting of shareholders and the shareholders have the right to inspect directors' service contracts.

 
13. Are directors allowed or required to own shares in the company?

The directors (and commissioners) of a company are allowed, but not required, to own shares in the company. The shareholdings of directors and their nuclear family in a limited liability company (PT) must be recorded in the PT's special register. Furthermore, the directors of a public or listed company must disclose their share ownership to the Indonesia Financial Services Authority and the Indonesian Stock Exchange.

 
14. How is directors' remuneration determined? Is its disclosure necessary? Is shareholder approval required?

Determination of directors' remuneration

Under Law No. 40 of 2007 on limited liability companies (Company Law), the remuneration of directors must be determined by the general meeting of shareholders. The Company Law permits the general meeting of shareholders to delegate the authority to determine the directors' remuneration to the board of commissioners.

Disclosure

The board of directors must disclose the directors' remuneration for the previous financial year in the company's annual report. The annual report must be presented to the annual general meeting of shareholders for approval. An additional requirement for a public or listed company is that the annual report must be made available on its websites.

For banks, the board of directors must disclose directors and commissioners' remuneration in a specific corporate governance report.

Shareholder approval

The shareholders must approve the remuneration of directors and commissioners through the annual general meeting of shareholders.

 

Management rules and authority

15. How is a company's internal management regulated? For example, what is the length of notice and quorum for board meetings, and the voting requirements to pass resolutions at them?

A limited liability company (PT) must have articles of association that are drafted in accordance with Law No. 40 of 2007 on limited liability companies (Company Law). The company's articles of association usually detail internal management rules and authority.

While companies are at liberty to set their internal management rules and authority, some of the standard rules applied include:

  • Notice regarding a board of commissioners or board of directors meeting must be given 14 days beforehand.

  • The quorum for a board of commissioners or board of directors meeting must not be less than 50% of members.

  • Resolutions are adopted by consensus or, failing that, by majority vote at the meeting.

  • The chair of a board of commissioners or board of directors meeting can cast the deciding vote in the case of a deadlock.

 
16. Can directors exercise all the powers of the company or are some powers reserved to the supervisory board (if any) or a general meeting? Can the powers of directors be restricted and are such restrictions enforceable against third parties?

Directors' powers

The board of directors is the company's executive arm. Generally, it can exercise all the powers of the company, unless determined otherwise;

  • Under Law No. 40 of 2007 on limited liability companies (Company Law).

  • Under the company's articles of association.

  • The general meeting of shareholders.

The board of commissioners has supervisory and oversight functions.

Restrictions

Law No. 40 of 2007 on limited liability companies (Company Law) requires the board of directors to obtain the general meeting of shareholders' approval for the following:

  • Transfer company assets or encumber company assets as security for a loan if those assets are more than 50% of the company's total net assets in one or more related or unrelated transactions.

  • Increase or decrease the company's capital.

  • Buyback the company's shares.

  • Amend the articles of association.

  • Approve the company's merger, consolidation, acquisition, separation or dissolution.

  • File a bankruptcy petition in the commercial court on behalf of the company.

A member of the board of directors is not authorised to represent the company if he or she:

  • Is involved in an ongoing case against the company.

  • Has a conflict of interest with the company.

The general meeting of shareholders can limit the board of director's powers and authority through the articles of association.

 
17. Can the board delegate responsibility for specific issues to individual directors or a committee of directors? Is the board required to delegate some responsibilities, for example for audit, appointment or directors' remuneration?

Unless the general meeting of shareholders determines otherwise, the board of directors can determine the allocation of its duties and authorities among its members through a board resolution.

Under a power of attorney, the board of directors can assign one or more of the company's employees (or any third party), to undertake certain legal actions for and on behalf of the company.

 

Directors' duties and liabilities

18. What is the scope of a director's general duties and liability to the company, shareholders and third parties?

The board of director's primary general duty as set out under Articles 92 and 98 of Law No. 40 of 2007 on limited liability companies (Company Law), is to carry out the day-to-day operations of the company, as well as to represent the company inside and outside the court.

The Company Law sets out certain specific duties of the board of directors, including the duty to submit annual work plans to the board of commissioners or general meeting of shareholders and annual reports to the general meeting of shareholders after consideration by the board of commissioners (Articles 63 to 69, Company Law).

The Company Law requires members of the board of commissioners and board of directors to perform their duties in good faith, prudently and responsibly in the interests of the company, and in accordance with its purpose and objectives.

Each member of the board of commissioners and board of directors who is at fault or negligent in performing his or her duties is personally liable for any of the resulting losses to the company.

A director or commissioner is not liable for the company's losses or bankruptcy if he or she can prove that:

  • The losses or bankruptcy are not attributable to his or her fault or negligence.

  • He or she managed the company in good faith, prudently and responsibly in the interests of the company and in accordance with the company's purpose and objectives.

  • He or she had no personal interest (directly or indirectly) in the actions causing the losses or bankruptcy.

  • He or she has taken action to prevent the occurrence or continuation of the losses, or the bankruptcy.

 
19. Briefly outline the regulatory framework for theft, fraud, and bribery that can apply to directors.

Law No. 40 of 2007 on limited liability companies (Company Law) requires members of the board of commissioners and board of directors to perform their duties in good faith, prudently and responsibly in the interests of the company, and in accordance with its purpose and objectives.

On the part of members of the board of commissioners or board of directors, the following matters are covered under the Indonesian Penal Code:

  • Theft. Article 362 of the Indonesian Penal Code.

  • Fraud. Article 378 of the Indonesian Penal Code.

  • Bribery. Articles 418 to 419 of the Indonesian Penal Code.

(For more information, see Articles 11 and 12 of Law No. 31 of 1999 on eradication of corrupt actions for bribery (as amended by Law No. 20 of 2001).)

Criminal sanctions for theft, fraud and bribery are as follows:

  • Theft. Imprisonment for between five and 20 years, or a fine.

  • Fraud. Imprisonment for between one and four years, or a fine.

  • Bribery. Imprisonment for between one year and life (in certain circumstances, capital punishment is possible).

 
20. Briefly outline the potential liability for directors under securities laws.

Any director (or commissioner) of a company who is found guilty of a breach or violation of Law No. 8 of 1995 on capital markets (Capital Markets Law) is subject to a fine, criminal sanctions or both. These vary from detention of up to one year, imprisonment for between three to ten years and a fine ranging from IDR1 billion to IDR15 billion.

 
21. What is the scope of a director's duties and liability under insolvency laws?

Law No. 37 of 2004 on bankruptcy and suspension of debt payment obligation does not specifically provide the scope of a director's duties and liability relating to the bankruptcy or suspension of debt payment obligations proceedings. However, Law No. 40 of 2007 on limited liability companies (Company Law) provides that where a bankruptcy occurs due to the fault or negligence of the board of directors, and the company's assets are not sufficient to pay all of the company's obligations, each member of the board of directors is jointly and severally liable for all obligations that remain unpaid by the bankruptcy estate. This personal liability applies to board members who were at fault or negligent and who served on the board of directors in the five-year period before the declaration of bankruptcy.

 
22. Briefly outline the potential liability for directors under environment and health and safety laws.

Under Law No. 32 of 2009 on environmental protection and management, administrative sanctions (such as a written warning, government coercion, the suspension of an environmental permit or the revocation of an environmental permit) can be imposed on directors in cases of serious violation of the environmental laws. The imposition of administrative sanctions does not discharge directors from restoration obligations or penal responsibilities and sanctions under the criminal law (Article 78, Law No. 32 of 2009 on environmental protection and management).

Law No. 36 of 2009 on health imposes corporate liability. The law obliges the employer (the company, not the directors) to ensure the health of employees through preventive efforts, improvement, treatment and recovery. The employer must bear the entire cost of the employees' healthcare. The employer must bear the cost of any health problems to employees that are caused as a result of their work. The employer must also participate in the government's social security programme for the benefit of its employees.

 
23. Briefly outline the potential liability for directors under anti-trust laws.

A director or commissioner is prohibited from holding a position as the director or commissioner of another company if that company (Law No. 5 of 1999 on the ban on monopolistic practices and unfair business competition):

  • Operates in the same relevant market.

  • Has significant relevance in the field of business.

  • Collectively has dominant markets for certain products or services that may trigger the ban on monopolistic practices or unfair business competition.

The violation of this provision is subject to a fine ranging from IDR5 billion to IDR25 billion.

 
24. Briefly outline any other liability that directors can incur under other specific laws.

A director must create a special register detailing the shares of the company and other company's shares owned by that director. If the director fails to fulfil this obligation, the director is personally liable against that loss of the company.

 
25. Can a director's liability be restricted or limited? Is it possible for the company to indemnify a director against liabilities?

Members of the board of directors cannot be held liable for the losses of the company if they can prove that (Article 97(5), Law No. 40 of 2007 on limited liability companies) (Company Law):

  • The losses were not due to their fault or negligence.

  • They carried out their management role in good faith, prudently and responsibly in the interests of the company and in accordance with the company's purpose and objectives.

  • They do not have a direct or indirect conflict of interest in the action causing the losses.

  • They took action to prevent the losses from arising or continuing.

The Company Law is silent on whether the company can indemnify a director (or commissioner) against liabilities. This issue can be addressed in the articles of association of the company. It is not common for a company to indemnify directors (or commissioners). A company can only indemnify its directors (or commissioners) if the indemnity is made in the company's best interests and there is no conflict of interest or violation of duties by the directors or commissioners.

The general meeting of shareholders can resolve to discharge the board of commissioners or board of directors from liability to the company to the extent that these matters are disclosed in the company's annual report. This discharge does not release the board of commissioners or board of directors from liability to third parties.

 
26. Can a director obtain insurance against personal liability? If so, can the company pay the insurance premium?

There is no statutory requirement for a director (or a commissioner) to take out insurance against personal liability. In practice, however, some independent directors (and commissioners) of large public companies in Indonesia obtain insurance against personal liability and their companies pay the insurance premiums.

 
27. Can a third party (such as a parent company or controlling shareholder) be liable as a de facto director (even though such person has not been formally appointed as a director)?

The concepts of de facto directors and shadow directors are not recognised in Indonesia. Law No. 40 of 2007 on limited liability companies (Company Law) adopts the concept of "piercing the corporate veil". Under Article 3(2) of the Company Law, a shareholder can be held personally liable if he or she is found to involve directly or indirectly the management of the company.

 

Transactions with directors and conflicts

28. Are there general rules relating to conflicts of interest between a director and the company?

A director is not entitled to represent the company if he or she is involved in litigation against the company or is in a conflict of interest with the company (Article 99, Law No. 40 of 2007 on limited liability companies) (Company Law).

In these situations, the duties of the director(s) concerned are assumed by:

  • The other members of the board of directors.

  • The board of commissioners, if all members of the board of directors are involved in litigation or are in a conflict of interest with the company.

  • Any person(s) appointed by the general meeting of shareholders if all members of the board of directors and board of commissioners are involved in litigation or are in conflict of interest with the company.

For public companies, an approval from the independent shareholders is required for any conflict of interest transactions between the director(s) and the company that may cause losses to the company.

 
29. Are there restrictions on particular transactions between a company and its directors?

Transactions between a company and its directors must not create a conflict of interest. Transactions between a company and its directors can be appraised by an independent party to determine whether the transaction is fair (that is, an affiliated party transaction) or if it creates a conflict of interest.

Public companies must disclose to the Indonesia Financial Services Authority any affiliated party transaction and publicly announce certain affiliated party transactions.

 
30. Are there restrictions on the purchase or sale by a director of the shares and other securities of the company he is a director of?

The purchase or sale of shares in the company by a director (or commissioner) is permitted but subject to insider trading restrictions under Law No. 8 of 1995 on capital markets (Capital Markets Law) and associated regulations.

 

Disclosure of information

31. Do directors have to disclose information about the company to shareholders, the public or regulatory bodies?

Directors of public companies must disclose certain information to shareholders, the public or regulatory bodies. This includes any information or material facts that may affect the company's stock value or an investor's decision. For example:

  • Merger, stock purchase, consolidation or the formation of joint ventures.

  • Stock split or stock dividend distribution.

  • Income arising out of a dividend of extraordinary nature.

  • Acquisition or loss of significant contracts.

  • Significant products or inventions.

  • Change in control or significant changes in management.

  • Announcements on repurchase or repayment of debt securities.

  • Material additional sale of securities to the public.

  • Purchase or loss on sale of material assets.

  • Important labour disputes.

  • Important lawsuits against the company, and its directors and commissioners.

  • Submission of bids for the purchase of securities of other companies.

  • Replacement of the accountant who audited the company.

  • Replacement of the trustee(s).

  • Changes in the company's fiscal year.

 

Shareholder rights

Company meetings

32. Does a company have to hold an annual shareholders' meeting? If so, when? What issues must be discussed and approved?

An annual general meeting of shareholders must be held no later than six months after the end of each financial year to discuss and adopt resolutions including:

  • Approval of the company's annual report.

  • Ratification of the company's audited financial statements.

  • Appropriation of profits (if the company has generated surplus profits).

  • Appointment of auditors (if required).

The annual report must contain:

  • A financial report consisting of at least the last balance sheet for the financial year just ended in comparison with the previous financial year, a profit and loss statement for the financial year concerned, a cash flow report, a report on changes in equity and notes on the financial report.

  • A report on the company's activities.

  • A report on the implementation of environmental and social responsibility.

  • Details of problems that arose during the financial year that influenced the company's business activities.

  • A report on the supervisory duties performed by the board of commissioners during the financial year just ended.

  • The names of the members of the board of directors and members of the board of commissioners.

  • Salaries and allowances for members of the board of directors, and salaries or honoraria and allowances for members of the board of commissioners of the company for the year just ended.

 
33. What are the notice, quorum and voting requirements for holding meetings and passing resolutions?

Notice

Notice of a general meeting of shareholders must:

  • Be in the form of a registered letter or through newspaper advertisement.

  • Include information on the date, time, place and agenda of the meeting, as well as where materials to be discussed at the meeting can be viewed or obtained.

  • Be given at least 14 days before the date of the general meeting of shareholders, excluding the date of the invitation and the date of the general meeting of shareholders.

Quorum

For a general meeting of shareholders, the following applies:

  • The meeting can be convened if more than one-half of the total shares with valid voting rights are present or represented, unless a higher quorum is required by the articles of association.

  • Resolutions are made by consensus or, failing that, are passed by affirmative votes of more than one-half of the total votes cast, unless a higher requirement is stated in the articles of association.

  • An adjourned general meeting of shareholders can be convened if one-third of the total shares with valid voting shares are present or represented, unless a higher quorum is required by the articles of association.

Where a general meeting of shareholders is convened to amend the company's articles of association:

  • The meeting can be convened if at least two-thirds of the total shares with valid voting rights are present or represented in the general meeting of shareholders, unless a higher quorum is required by the articles of association.

  • Resolutions are passed on the affirmative votes of at least two-thirds of the total votes cast, unless a higher requirement is stated in the articles of association.

  • An adjourned meeting can be convened if three-fifths of the total shares with valid voting rights are present or represented, unless a higher quorum is required by the articles of association.

Where a general meeting of shareholders is convened to approve mergers, acquisitions, consolidations, spin-offs, insolvency, extensions of the term of incorporation and liquidation of the company:

  • The meeting can be convened if at least three-quarters of the total shares with valid voting rights are present or represented, unless a higher quorum is required by the articles of association.

  • Resolutions are passed on the affirmative votes of at least three-quarters of the total votes cast, unless a higher requirement is stated in the articles of association.

  • An adjourned meeting can be convened if two-thirds of the total shares with valid voting rights are present or represented, unless a higher quorum is required by the articles of association.

Shareholders can adopt resolutions outside a formal general meeting of shareholders if all shareholders agree in writing and sign the resolutions. A general meeting of shareholders can be held via teleconference, video conference or other electronic medium that enables all participants in the general meeting of shareholders to view and hear each other directly and to participate in the meeting. Minutes of the general meeting of shareholders must be made, approved and signed by all participants in the general meeting of shareholders.

 
34. Are specific voting majorities required by statute for certain corporate actions?
 
35. Can shareholders call a meeting or propose a specific resolution for a meeting? If so, what level of shareholding is required to do this?

A general meeting of shareholders can be held at the request of one or more shareholders jointly representing at least one-tenth of the total number of shares having valid voting rights, except if a lesser representation is permitted by the articles of association. There is no specific level of shareholding required to conduct such a general meeting of shareholders. Shareholders may request a general meeting of shareholders when, for example, the board of directors fails to hold the (annual) general meeting of shareholders or if the term of the members of the board of directors or the board of commissioners is about to end.

 

Minority shareholder action

36. What action, if any, can a minority shareholder take if it believes the company is being mismanaged and what level of shareholding is required to do this?

If minority shareholders find that company actions are damaging their interests, they can require the company to purchase their shares at a fair price. Minority shareholders representing at least one-tenth of the total shares with valid voting rights can take derivative action on behalf of the company against the company's directors or commissioners if those directors or commissioners have acted unlawfully and to the detriment of shareholders and third parties.

 

Internal controls, accounts and audit

37. Are there any formal requirements or guidelines relating to the internal control of business risks?

There are no formal requirements or guidelines relating to the internal control of business risks, although the board of commissioners' supervisory functions would naturally cover assessing and identifying business risks. Certain sectors (such as finance and banking) are subject to requirements relating to risk management.

In the banking sector, there are requirements and guidelines for commercial and Syariah banks (using the Islamic banking system) to implement the internal control system in risk management.

For commercial banks, the Bank of Indonesia Regulation No. 5/8/PBI/2003 on the implementation of risk management for commercial banks dated 19 May 2003 (Risk Management Regulation) requires that the bank's internal control system in risk management must address, among other factors, the conformity of the internal control system with the attached risk level to the business activities It must also provide an effective, independent and objective review of the evaluation procedure of the operation (Article 15, Risk Management Regulation). Any violation of this provision leads to administrative sanctions, such as a written warning and the suspension of certain business activities (Article 34, Risk Management Regulation).

For Syariah banks, the Bank of Indonesia Regulation No. 13/23/PBI/2011 on the implementation of risk management for Syariah banks and Syariah business units dated 2 November 2011 (Syariah Risk Management Regulation) requires that the scope of the internal control system in risk management is the same as that of commercial banks (Article 30, Syariah Risk Management Regulation). However, there is an additional sanction to the violation of the provisions, that is, listing the members of management, employees of the bank, and the shareholders who failed the fit and proper test, in the administration records of the Bank of Indonesia as stipulated by the prevailing regulations of the Bank of Indonesia (Article 30, Syariah Risk Management Regulation).

With regard to certain financial services institutions (such as financing companies), the Indonesia Financial Services Authority Regulation No. 30/POJK.05/2014 on the good corporate governance of financing companies dated 19 November 2014 (Financing Companies Regulation) requires that the guidelines relating to the internal control of financing companies must provide for, among other factors, an internal control environment that is disciplined and structured, and a process to identify, analyse, evaluate, and manage business risk (Article 51(2), Financing Companies Regulation).

 
38. What are the responsibilities and potential liabilities of directors in relation to the company's accounts?

The board of directors is responsible for the accuracy of the company's accounts and financial position. Members of the board of directors are jointly and severally liable for any loss suffered by the company resulting from their failure to perform their duties in good faith, prudently and responsibly.

 
39. Do a company's accounts have to be audited?

The financial statement presented by a company at its annual general meeting of shareholders must be audited by a public accountant if the company:

  • Is engaged in business activities that are related to the mobilisation and use of public funds.

  • Issues promissory notes to the public.

  • Is a publicly owned or listed company.

  • Is a state-owned enterprise.

  • Has assets or total business turnover of at least IDR50 billion.

  • Is required to do so by relevant laws or regulations.

 
40. How are the company's auditors appointed? Is there a limit on the length of their appointment?

The general meeting of shareholders will appoint the company's auditor (public accountant).

The auditor can be appointed for the following maximum terms:

  • If a public accounting firm, a maximum of six consecutive financial years.

  • If an individual accountant, a maximum of three consecutive financial years.

 
41. Are there restrictions on who can be the company's auditors?

In Indonesia, to audit a company's financial accounts the accountant must be registered with the association of professional public accountants and hold a valid licence from the Minister of Finance.

To conduct audits on a public company, the auditor must hold a licence to do so from the Indonesia Financial Services Authority. The accountant must also be independent and free from any conflict of interest.

A public accountant must not:

  • Hold a position as a state official.

  • Be the chair or employee of governmental departments or institutions.

  • In any other way cause a conflict of interest.

 
42. Are there restrictions on non-audit work that auditors can do for the company that they audit accounts for?

Other than audit work, public accountants can provide other services related to accountancy, finance, management, compilation, tax and other consultancy services according to their competency.

However, a public accountant working through a public accounting office is prohibited from delivering services other than audit and the services mentioned above.

 
43. What is the potential liability of auditors to the company, its shareholders and third parties if the audited accounts are inaccurate? Can their liability be limited or excluded?

Law No. 5 of 2011 on public accountants provides for criminal charges if the public accountant:

  • Manipulates, assists in the manipulation of or falsifies data relating to services provided.

  • Intentionally manipulates, falsifies or mislays data or notes on the working papers, or fails to prepare working papers so they cannot be properly used during examination by the relevant authority.

The penalty may be imprisonment, a fine of up to IDR300 million or both. A public accountant found guilty of criminal action can have his or her licence to practice revoked.

 
44. What is the role of the company secretary (or equivalent) in corporate governance?

A public company must have a company secretary.

The company secretary's role relevant to corporate governance includes:

  • Updating the public company on capital market practices, particularly regulations in the capital markets sector.

  • Providing investors with information on the company.

  • Assisting the board of directors in complying with capital market laws and regulations.

  • Acting as a contact person between the company, the Indonesia Financial Services Authority and the investors.

The role of company secretary can be performed by a member of the board of directors of the company.

 

Online resources

Ministry of State Secretariat of the Republic of Indonesia

W www.setneg.go.id

Description. This is an official website of the Ministry of State Secretariat. The website contains official and up-to-date information on Indonesian laws. The English-language version is for guidance only.

Law No. 40 of 2007 on limited liability companies (Company Law).

W www.setneg.go.id//images/stories/kepmen/legal_product/economic/law_of_the_republic_of_indonesia_number_40_of_2013_limited_liability_company.pdf

Description. English translation of Law No. 40 of 2007 on limited liability companies (Company Law). 

Law No. 25 of 2007 on capital investments.

W www.setneg.go.id//images/stories/kepmen/legal_product/economic/law_of_the_republic_of_indonesia_number_25_of_2007_investment.pdf

Description. English translation of Law No. 25 of 2007 on capital investments. 

Indonesia Financial Services Authority

W www.ojk.go.id/

Description. This is an official website of the Indonesia Financial Services Authority. The Indonesia Financial Services Authority was established in 2011 by the government through Law No. 21 of 2011 to replace the function of the Capital Market Supervisory Board. The Indonesia Financial Services Authority regulates and supervises a wholly integrated system in the financial sector. The website contains official and up-to-date information. However it does not provide any English-language versions of regulations or laws.

Unofficial translation of Law No. 8 of 1995 on capital markets (Capital Markets Law) (English-language version).

W www.bapepam.go.id/old/old/e_legal/law/

Description. The link above is from the official website of the Capital Market Supervisory Board. However, this is no longer updated since it was replaced by the Indonesia Financial Services Authority. The English-language version is for guidance only.



Contributor profiles

Tony Budidjaja, Managing Principal and Partner

Budidjaja & Associates Lawyers

T +62 21 520 1600
F +62 21 520 1700
E tony@budidjaja.id
W www.budidjaja.id

Professional qualifications. Qualified to practise in Indonesia since 2000; Capital Market Legal Accountant and Tax Court Attorney

Areas of practice. Commercial dispute resolution (litigation, arbitration, bankruptcy and insolvency); competition/anti-monopoly; international trade and custom; insurance and reinsurance

Non-professional qualifications. University of Leiden, The Netherlands, Masters of Law degree in International Business Law; University of Tarumanagara, Indonesia, Bachelor of Law degree in Business Law.

Languages. Bahasa Indonesia, English

Professional associations/memberships.

  • Australasian Forum for International Arbitration (AFIA).
  • Chartered Institute of Arbitrators (CIArb).
  • Indonesian Advocates Association (PERADI).
  • Indonesian Maritime Law Association (IMLA).
  • Indonesian Mediation Centre (BAMI).
  • Indonesian Mediators Association (AMINDO).
  • International Bar Association (IBA).
  • International Chamber of Commerce (ICC).
  • ICC Indonesia - Co-Chair of Commission on Arbitration and Commercial Law.
  • Kuala Lumpur Regional Centre for Arbitration (KLRCA).
  • Law Association for Asia and the Pacific (LAWASIA)

Publications.

Indonesian contributor for:

  • Shahla F. Ali and Tom Ginsburg, International Commercial Arbitration in Asia (Juris, 3rd ed, 2013).

  • Akira Kawamura, Corporate Governance: Jurisdictional Comparisons (Sweet & Maxwell, 2nd ed, 2013).

Juni Dani, Principal and Partner

Budidjaja & Associates Lawyers

T +62 21 520 1600
F +62 21 520 1700
E juni@budidjaja.id
W www.budidjaja.id

Professional qualifications. Qualified to practise in Indonesia since 2007.

Areas of practice. Corporate mergers and acquisitions; shipping; foreign direct investment and joint ventures; industrial relations and employment.

Non-professional qualifications. University of Tarumanagara, Faculty of Law, Bachelor of Law degree, prize for best graduate student in 2003; courses on Chinese at the College of International Exchange in Shanghai University (2006); Maritime Law and Practice at the Institute of Martime Law, University of Southampton in Singapore (2010); Contracts, Shipping and Dispute Resolution at GAFTA in Dalian, China (2011).

Languages. Bahasa Indonesia; English; Chinese Mandarin

Professional associations/memberships.

  • Indonesian Maritime Law Association (IMLA).
  • Maritime Law Association of Singapore (MLAS).
  • Indonesian Bar Association (PERADI).

Publications.

Indonesian contributor for:

  • Akira Kawamura, Jurisdictional Comparisons: Corporate Governance (European Lawyer, 2nd ed, 2013).
  • David Lucas, Shipping & International Trade Law (European Lawyer, 2nd ed, 2015).

Other.

  • Ramai-ramai Ajukan Penundaan Kewajiban Pembayaran Utang (Massive Applications for Filing Suspension of Payment Obligation) (Bisnis Indonesia, 6 November 2012).

  • Seminar on Doing Business in Indonesia (Tokyo, 2013).

  • Indonesian speaker on "Sailing into the Straits of Melaka" Seminar, held by Skrine (Kuala Lumpur, 2013).

  • Ship Arrest in Indonesia (Indonesian Maritime Law Association Tea Talk, 2014).


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