1. ca corporate governance intro

1. Corporate Governance: An Overview
Sidharta Utama
Ikatan Akuntan Indonesia

2. Outline
•Needs for Corporate Governance (CG)
•Definition of CG
•Benefits of good CG
•Principles of good CG
•CG in Indonesia
•CG Metrics

3. Why do we need CG?
•Corporation interacts with various parties in conducting its business:
–Directors / Management
–Stockholders
•Majority
•Minority
–Creditors
–Government
–Employees
–Public

4. Principal-Agent Relationships
•An agent has decision making authority that affects the well-being of the principal.
•Examples of principal-agent relationship:
–Stockholders - Manager
–Creditors - Firm
–Controlling Stockholders –Non-Controlling Stockholders
–Government – Firm
–Employees – Firm
–Public - Firm

5. Conflict of Interests
•Insiders have an information advantage over other parties (i.e. outsiders).
–Insiders: Management, Majority Stockholders
–Outsiders: Creditors, Minority Stockholders, Government, Employees, Public
•These parties pursue their own interests (i.e., self-interest), which can be conflicting
•As a result, the parties whose action is unobservable tend to shirk (i.e., insiders), which is detrimental to the other parties

6. Stockholder-Manager Conflicts
•The self-interested behavior of managers may be at conflict with the interest of stockholders.
•Managers may favor growth and larger size of the firm:
–Greater job security
–Larger compensation
–Greater prestige
–Larger discretionary expense accounts

7. Stockholder-Manager Conflicts
•Consumption of excessive perquisites.
–Direct benefits: use of company car, expense accounts.
–Indirect benefits: up-to-date office decor.
•Shirking
–They may not put forth their best efforts.
•Non-Diversifiability of Human Capital
–Mangers’ expertise is closely tied to the firm.
–This leads to a divergence of goals.
•Examples:
–Enron, Worldcom
–Bank Global

8. Debtholder-Stockholder Conflicts
•Now, stockholders are the agents and the debtholders are the principals.
•When a firm issues risky debt, stockholders have an option against the debtholders.
–The option to default on debt.
•Examples

9. Controlling – Non-controlling Shareholders
•Controlling shareholders may expropriate wealth from non-controlling shareholders through among others Related Party Transactions.
•The presumption that transactions are done on an arm’s length basis between independent parties may not be valid.
•Transactions between related parties may not be effected at the same terms and conditions as between unrelated parties.
•Examples: Bank Century, Parmalat, Satyam

10. Controlling – Non-Controlling Conflicts
$ 1 million
20 hectares of land
75% 25% 100%
Public Corporation
Private Corporation
Public/Non- controlling Shareholders
Controlling Shareholders

11. Need for CG
•To control the possible conflict of interests among parties
•To protect the interests of principals
•Ultimate Objective: enhancing shareholder value, whilst taking into account the interests of other stakeholders.

12. Corporate Governance: Definition
•The process and structure used to direct and manage the business and affairs of the company towards enhancing business prosperity and corporate accountability.
•CG is concerned with holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations, and society (Cadbury Report).

13. Corporate Governance: Definition
•Cadbury (1992): Corporate governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance.

14. What can good corporate governance bring to a corporation?
•Creation and enhancement of a corporation’s competitive advantage
•Enabling a corporation to perform efficiently and preventing fraud and malpractice
•Providing protection to shareholders’ interest
•Increasing the valuation of an enterprise
•Ensuring compliance with laws and regulations
•Alleviating poverty by enhancing social responsibilities

15. Top 30: More Highly Valued than the rest of PLCs at IDX
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16. Top 30: More profitable than the rest of PLCs at IDX
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17. Pillars of Corporate Governance
Transparency
Accountability
Responsibility
Independence
Fairness
IICD
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18. OECD Principles of Corporate Governance
1.Ensuring the basis of corproate governance framework
2.Protecting shareholders’ rights.
3.The equitable treatment of shareholders, including minority shareholders.
4.Recognizing the rights of stakeholders and encouraging active co-operation between corporations and stakeholders.
5.Ensuring timely and accurate disclosure is made on all material matter regarding the corporation.
6.Effective monitoring of management by the board, and the board’s accountability to the company and the shareholders.
This course focuses on Principle 2 to 6.

19. Evidence on CG Practice in Indonesia
-World Bank
-IICD

20. World Bank: 2010 CG ROSC Assessment of Indonesia
•Benchmarks law and practice in Indonesia against the OECD Principles of Corporate Governance
•By the end of June 2010, 75 assessments had been completed in 59 countries around the world.
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21. Summary of Results
CG Principles
2009
2004
Asia Pacific Region
Enforcement & Institutional Framework
72
-
68
Shareholder Rights
72
56
73
Equitable Treatment of Shareholders
75
60
62
Role of Stakeholders
70
60
71
Disclosure & Transparency
73
60
72
Responsibility of the Board
66
60
68
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22. The CG Ranking of
ASEAN
PLCs & the CG SCORECARD

23. ASEAN Corporate Governance ranking - Background
Objectives
•Raise CG standards and practices of ASEAN
•Showcase and enhance visibility and investability of well-governed ASEAN PLCs
•Complement other ACMF initiatives and promote ASEAN as an asset class
Approach
•ACMF: Create a universal CG Scorecard containing key elements of good CG
•Devise a scoring methodology
•Validate and publish ASEAN CG Scorecard
•Assess ASEAN PLCs identifying top 50 PLCs in each jurisdiction and top 50 PLCs regionally
Progress
•ASEAN CG Scorecard released to public in March 2012
•Assessment of 100 PLCs in 6 ASEAN Countries, July – Oct 2012
•Release of domestic top 50 PLCs in Feb 2013
•Submit top 50 PLCs regionally to regulators in March 2013
•Release of top 50 PLCs regionally in year 2015
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24. Raising CG Practices with ASEAN CG Scorecard
ASEAN CG Scorecard
Enhancing CG Rules/Standards
Improving Compliance with Rules/Standards
Encouraging Voluntary Adoption of CG Practices
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25. ASEAN CG Scorecard
Globally Based
•OECD CG Principles
•Other International and Regional Standards
Regionally Developed
•Six participating countries
•Move beyond local rules/standards
Public Information
•English
•Easily Accessible
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26. 26
Level 1 Has five major sections that corresponds to the OECD Principles Part A: Right of Shareholders (26) Part B: Equitable Treatment (17) Part C: Role of Stakeholders (21) Part D: Disclosure & Transparency (42) Part E: Responsibilities of the Board (79) Total no of items/ descriptors (185)
Level 2 Two additional Sections Bonus & Penalty (11) Bonus items for companies that go beyond minimum standards (23) Penalty items for companies with poor practices Total bonus and penalty items (34)
There are two levels to the ASEAN CG Scorecard
STRUCTURE OF THE ASEAN CG SCORECARD

27. Sources of Information
•Annual Report
•Website
•Press Release/Corporate announcements
•Notice of Meeting of Shareholders
•Resolutions of Meeting of Shareholders
•Minutes of Meeting of Shareholders
•Board manual/charter
•Code of conduct/ethics
•Sustainability/CSR Report
•Media coverage
•Any other easily accessible public information
•Language: Indonesia and English
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28. Scoring Methodology
Assessment relies primarily on publicly available and easily accessible information – annual report, company websites, company announcements, circulars, articles of association, minutes of shareholders meetings, CG policies, codes of conduct and sustainability reports.
Step 1: Level 1 Scoring
each descriptor/ item in Level 1 attracts 1 point
add all scores in each Part, divide by the number of questions, multiply weightage and then add to sum of other Parts
conducted by the individual CG experts designated to assess that country
peer review conducted on a sample for quality control
If items are mandated, by default get 1 point (except for part D)
Step 2: Level 2 Scoring
bonus scores varies (from +1 to +2)
penalty scores (from - 1 to -10)
Step 3: Total Scores
add up sum of level 1 and 2 to arrive at final score
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29. CG Scorecard: Results for Indonesia
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30. Avg CG Score by Sector, Ownership, and Size
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31. Rights of Shareholders
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Strengths
Weaknesses

32. Equitable Treatment of Shareholders
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Weaknesses: Supplementary information for notice of AGM rarely provided Lack of timely reporting of company shares trading by insiders Lack of a policy requiring independent committee to review material RPTs
Strengths: Board members abstain from making decisions when they are conflicted Few instances of financial assistances to entities other than wholly-owned subsidiaries Rule prohibiting insider trading

33. Role of Stakeholders
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Strengths: Policy and programs on social responsibility Policy on health, safety, and welfare of employees Policy on training and development programs for employees Separate section on corporate responsibility in annual report
Weaknesses: Inadequate policy and programs on supplier selection practice Lack of policy and activities on anti-corruption program Whistleblowing mechanism is still uncommon

34. Disclosure & Transparency
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Weaknesses: Failure to disclose indirect ownership of insiders Lack of disclosure of the extend of company"s compliance with the code in the annual reports. Failure to disclose board members’ directorship in other listed companies. Failure to disclose audit fees and non-audit fees
Strengths: Disclosing financial performance indicators in the annual report Disclosing name of related parties, nature and value of RPTs Publishing quarterly financial reports and audited financial statements in less than 90 days. Downloadable financial statements and annual reports as well as business operations in company website

35. Responsibility of the Board
Strengths: At least one commissioner has prior working experience in the major industry the companies are operating in, Members of audit committee entirely independent Adequate disclosure of audit committee’s task, composition, number of meetings, and attendance Adequate disclosure of Internal control procedures/risk management system
Weaknesses: Lack of disclosure of the nomination process of board members, including key executives Lack of performance appraisal on the board, committees, and members of the boards Lack of rules on term limit of independent commissioners as well as limit of board seats in PLCs that a commissioner may hold simultaneously Failure to disclose the frequency of meeting of BOC and the attendance rate of each member of BOC
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36. For more information, pls visit: http://www.theacmf.org/ACMF/upload/asean_cg_scorecard.pdf