Issues regarding corporate governance in Indonesia revolve around the implementation of corporate governance in the regulations and the execution thereto. Compared to other countries, corporate governance in Indonesia is still developing, particularly for those businesses not covered by specific corporate governance regulations. However, with the regulations passed by the Financial Services Authority (Otoritas Jasa Keuangan or OJK), there are now more specific provisions on corporate governance other than the general provisions in Law No. 40 of 2007 regarding Limited Liability Companies (the “Company Law”).
Environmental, Social and Governance (ESG) Considerations
The Company Law and Government Regulation No. 47 of 2012 regarding the Social and Environmental Responsibilities of Limited Liability Companies (“GR 47”) contain provisions related to ESG issues.
Under Article 74 paragraph (1) of the Company Law, a company that conducts business activities in the field of and/or related to natural resources must implement corporate social and environmental responsibility measures. The same requirement is contemplated in Article 3 of GR 47. Additionally, Article 5 paragraph (1) of GR 47 states that companies that conduct business activities in the field of and/or related to natural resources must pay attention to propriety and fairness in preparing and determining work plans and budgets.
The above provisions raise the question of whether corporate and environmental responsibility is limited to those companies that operate in the field of and/or related to natural resources.
Government Regulation 47
According to Articles 4 and 6 of GR 47, social and environmental responsibility shall be implemented by the Board of Directors pursuant to the company’s annual work plan upon obtaining the approval of the Board of Commissioners (BOC) or General Meeting of Shareholders (GMS) in accordance with the company’s Articles of Association, unless determined otherwise under the prevailing laws and regulations. The implementation of social and environmental responsibility shall be included in the company’s annual report and the company shall be accountable to the GMS for the implementation.
It is arguable that all business actors are subject to social and environmental responsibility implementation. Article 15 of Law No. 25 of 2007 on Investment (the “Investment Law”) provides that every investor has the obligation to, among other things, implement corporate social responsibility. Article 16 of the Investment Law adds that every investor shall be responsible, among other things, to preserve environmental sustainability.
Failure to fulfil the obligations under Article 15 of the Investment Law may be subject to administrative sanctions in the form of written warning, restriction of business activities, suspension of business and/or investment facilities, or revocation of business activities and/or investment facilities. There is no indication that these sanctions having ever been enforced.
This first appeared in the Chambers Corporate Governance 2020 global guide, published by Chambers and Partners. You can find the full chapter here.
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