Corporate Governance &

Risk Management
Introduction to Corporate Governance

By Prof. Sidharta Utama PhD, CA, CFA & Siti Nuryanah, SE, Ak.,
MSM, MBus (Acc), PhD

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01 Why Corporate Governance & Definition

02 Principles of Corporate Governance Outline

03 Mechanisms of Corporate Governance

04 Structure of Corporate Governance

05 Corporate Governance in Indonesia

06 Charter of Corporate Governance – An Example

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Goal of the Firm
Board of
Commissione
rs: Oversee
and advise
BOD
Best interest
of the
company:
Long-term
Value creation
BOD: Lead &
manage the
company

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Separation of Ownership and Control: Resources
Owners (Principals) and Managers (Agents)
Public
Sharehol
ders
Financial Capital,
Other Human Capital,
Bondhol
stakehol Regulatory
ders
ders Capital, Social
Controlling Capital, Natural
shareholders and Capital
Management

Other
Govern
Debthol
ment
ders
Employe
es

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 https://www.youtube.com/watch?v=ot1_DlwDs7s menit 1 -1.22 Enron

Enron….

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 Worldcom …
https://www.youtube.com/watch?v=fq5M9kdLM0o

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Lehman Brothers

• https://www.cleverism.com/t
he-collapse-of-lehman-
brothers-a-case-study/

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 • https://www.youtube.com/watch?v=PhrIEuwC
MUo Garuda Indonesia
• https://www.youtube.com/watch?v=shXZcpYsO
PQ Garuda Indonesia

Garuda Indonesia

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 Jiwasraya

• https://www.youtube.com/watch?v=FxM
izwQ5I4Y Jiwasraya
• https://www.youtube.com/watch?v=9UQ
O3CF2_5M Jiwasraya (konsep)

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Inti Indorayon Utama – Social &
Environmental Disaster

https://jurnal.unimed.ac.id/2012/index.p
hp/ph/article/download/16329/12680

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01
Why Corporate Governance

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 Why Corporate Governance

Corporate Collapses/mediocre performance à Root of Cause

Self-interest behaviour (Management/Controlling shareholders – the
agent)
Asymmetric information between the agent and the principals (public
shareholders & stakeholders)
Weak oversight on BOD/Management team
Good corporate governance ensures the achievement of the corporate’s
objective, which is to achieve sustainable firm value creation, while taking
into account the interests of stakeholders.

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Conflict of Interests between Principals and
Agents
• Shareholders vs. Management (Agency Conflict Type One)
• Enron, Worldcom
• Non-Controlling shareholders vs. Controlling Shareholders (Agency Conflict Type Two)
• Parmalat, Satyam, Tiga Pilar Sejahtera
• Principal beneficiaries vs. Management
• Insurance companies (Jiwasraya, Asabri), Pension funds (Pertamina Pension Fund),
Asset management companies
• Stakeholders vs. Management/Controlling shareholders
• Environment, Employees, Society, Government, etc

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Definition of Corporate Governance

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 • Corporate governance involves a set of
relationships between a company’s management,
its board, its shareholders and other stakeholders.
What is
Corporate • Corporate governance also provides the structure
Governance? through which the objectives of the company are
set, and the means of attaining those objectives,
(OECD, 1999) and monitoring performance, are determined.

• It aims to balance economic and social goals,

individual and communal goals.

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What can good corporate governance bring to a corporation and
to the economy?
Corporation
• Better operational performance
• Increased access to external financing
• Lower cost of capital and higher valuation
• Preventing fraud/corporate scandals
• Alleviating poverty/environmental disaster by enhancing social
responsibilities, enhance reputation to stakeholders
• Ensuring compliance with laws and regulations

The Economy
• More productive and higher level of investments
• Higher growth of labor and economy
• Reduce risk of financial crises
• Reduce social and environmental issues
• Poverty reduction
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CG & Sustainability delivers…..

1) Business results 2) Client Satisfaction 3) Development Dividend

High E&S performers fare better when compared with

the market (MSCI Emerging Markets Index)
Average annual returns (July 1, 2010 – June 30, 2015)

7,1
5,8
5,3

Low E&S MSCI Emerging High E&S

Performers Markets Index Performers

Subgroup comparison: Top 25% vs. Bottom 25% in the adherence to CG practices
(Full CG Index): ROIC/ROE
20.0

Improved CG and
15.0 improved E&S ranked first
13.05
10.96 and third place by clients,
10.0 on benefits resulting from
Adherence to
Full CG Index:
Advisory Services received
5.0
84%
Adherence to
Full CG Index: from IFC.
42%

0.0
ROIC/ROE
Top 25% CG Bottom 25% CG

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 Some Theories Related to Corporate Governance

The Modern Corporation and Private

Property (Berle and Means, 1932)
Agency Theory

Managers are supposed to be the Asymmetric information

‘agents’ of a corporation’s ‘owners’,
but managers must be monitored,
and institutional arrangements must Moral Hazard
provide some checks and balances
to make sure they do not abuse their
power. Conflict of interests

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 The Development of Corporate Governance

Stewardship Stakeholder
Theory Theory
Stewardship theory is a theory
that managers, left on their own, will act as
Takes account of a wider group of
responsible stewards of the assets they constituents rather than focusing on
control. shareholders. Where there is an emphasis
on stakeholders, the governance structure
of the company may provide for some direct
representation of the stakeholder groups.

Other
theories
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02
Principles of Corporate Governance

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Four Pillars of Corporate Governance (Pedoman Umum
Governansi Korporat Indonesia (PUGKI, 2021)

Sustainable Value Creation

Ethical Behavior
Transparency

Accountability

Sustainability
Strong commitment to implement good corporate governance

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Transparency (PUGKI, 2021)
• The corporation provides material and relevant
information in a way that is easily accessible and
understood by stakeholders.
• The corporation takes the initiative to disclose not
only issues required by laws and regulations, but
also matters that are important for decision making
by shareholders, creditors and other stakeholders.

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Accountability
• Corporations are accountable for their performance in
a transparent and fair manner.
• For this reason, the Corporation must be managed
properly, measurably and in accordance with corporate
interests while taking into account the interests of
shareholders and stakeholders.
• Accountability is a necessary prerequisite to achieve
sustainable performance.

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Sustainability
• The corporation complies with laws
and regulations and is committed to
carrying out its responsibilities to society
and the environment in order to
contribute to sustainable development
through collaboration with all relevant
stakeholders to improve their lives in a
way that is in line with business interests
and the sustainable development
agenda.

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Perilaku Beretika

• In carrying out its activities, corporation always prioritizes

honesty, treats all parties with respect, fulfill commitments,
builds and maintains moral values and trust consistently.
The corporation pays attention to the interests of
shareholders and other stakeholders based on the
principles of fairness and is managed independently so that
each organ of the company does not dominate each other
and cannot be intervened by other parties.

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G-20/OECD Principles of
Corporate Governance (2015)
1. Ensuring the basis of corporate governance framework
2. The rights and equitable treatment of shareholders and key ownership
function (Addressing agency costs resulting from Agency Conflict between
management/controlling shareholders and public shareholders)
3. Institutional investors, stock markets and other intermediaries (Addressing agency
conflicts of institutional investors and capital market intermediaries)
4. Recognizing the rights of stakeholders and encouraging active co-operation
between corporations and stakeholders (Addressing agency costs resulting
conflict between management/controlling shareholders and stakeholders).
5. Ensuring timely and accurate disclosure is made on all material matter
regarding the corporation (Reducing information asymmetry).
6. Effective monitoring of management by the board, and the board’s
accountability to the company and the shareholders (Monitoring the agent).
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.
03
Structure of Corporate Governance

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Tripod of Corporate
Governance
Shareholders
Three most significant players in the corporate Directors
process:
• Shareholders
• Supervisory Boards
• Board of Directors (Management) Board of Supervisory
Shareholders
Management Managers
Board
Together, these forces shape a corporation’s
focus, its direction, its productivity and
competitiveness, and ultimately, its viability and
legitimacy.

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Tripod of Corporate
Tripod of Corporate Governance
Governance

Shareholders
Directors
Appoint Appoint

Accountable Accountable

Oversee & Advice

Board of Management Supervisory Board
Shareholders Managers
Respond & Report

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 Board Structure

One tier Two tier

Shareholders’ Meeting Shareholders’ Meeting Shareholders’ Meeting

Board of Directors: Supervisory Board

(Board of Commissioners) Supervisory
Executive Board
Board of
and (Board of Directors
Non-executive Board of Directors Commissioners)

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04
Mechanisms & System of Corporate Governance

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 Capital Market

Shareholders (RUPS) Creditors/ Investors

Dividends

Board of Comissioners – Board of Directors -Management Internal Control & Risk

Supervisory Board Management Interest Rev

Business Objective Equity Liability

Investment decisions Strategic planning Financing decisions

Retained Profit

Fixed and working capital control Operational planning and control Profit control

Dividends
Internal Governance Mechanisms:
Board oversight & advisory, board composition & remuneration, ethics & shared values, internal control risk management policies,
disclosure & transparency

External Governance Mechanisms:

Accounting Standards, Stock Exchange and Corporate Law, Tax Act, Practice and Regulations Specific to Industry, Supporting Institutions and
Professionals
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Source: Nuryanah (2015)
Corporate Governance System

33
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05
Regulations on CG

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 Regulations on
CG

Comply/Apply or
Mandatory (Law,
Explain (CG
rules)
Code)
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 • “The comply or explain principle

Comply stipulates that corporations

should comply with the Corporate
Governance Code (also called
or Code) or explain reasons why they
do not comply.”

Explain (https://thebusinessprofessor.com/l
esson/comply-or-explain-uk-
definition/)

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Apply or Explain

• “King III, therefore, is on an “apply or explain” basis and its practical execution should be
addressed as follows: It is the legal duty of directors to act in the best interests of the
company. In following the “apply or explain” approach, the board of directors, in its
collective decisionmaking, could conclude that to follow a recommendation would not, in
the particular circumstances, be in the best interests of the company. The board could
decide to apply the recommendation differently or apply another practice and still achieve
the objective of the overarching corporate governance principles of fairness,
accountability, responsibility and transparency. Explaining how the principles and
recommendations were applied, or if not applied, the reasons, results in compliance.
(King Committee on CG in South Africa, 2009, p. 7 in Natesan, 2019, p. 57)

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Apply or Explain
• “The move to “apply” took King III further from the rules-
based approach implied in “comply”, signalling a greater
flexibility in that companies could deviate from a suggested
practice and still be deemed to be compliant with the
overarching corporate governance principles”
(Natesan, 2019, p. 57)

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Comply/Apply or Explain

Recommended CG Practices

Mandatory CG
Practices
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06
Corporate Governance in Indonesia

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 Some Rules on Corporate Governance in Indonesia

1. KNKG –Pedoman Umum GCG Indonesia (2021)

2. UU PT No. 40/2007
3. POJK Nomor 21/POJK.04/2014 tentang Penerapan Pedoman Tata Kelola
4. Permen BUMN: Per-01/S.MBU/2011 tentang Penerapan GCG pada
BUMN
5. Keputusan Sekretaris Kementerian BUMN SK-16/S.MBU/2012 tentang
Indikator/Parameter Penilaian dan Evaluasi atas Penerapan GCG pada
BUMN
6. Keputusan Menteri Keuangan No. 505/KMK.06/2020 tentang Pedoman
Penilaian dan Evaluasi atas Penerapan Tata Kelola Perusahaan yang Baik
pada Perusahaan Perseroan (Persero) di Bawah Pembinaan dan
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OJK’s effort to improve CG practices of
PLCs

Launched Corporate Governance Roadmap

Issued new rules/Revised existing rules, among others:

• Audit Committee (December 2012, updated 2015)
• Annual Report (December 2012, updated 2015)
• General Meeting of Shareholders (December 2014)
• Board of Commissioners and Directors (December 2014)
• Nominatiion and Remuneration Committee (December 2014)
• Corporate Secretary (December 2014)
• Website for public companies (June 2015)
• CG Code for Listed Companies (October 2015)
• Sustainable development (July 2017)

Impose ‘Comply or Explain Rule’ to CG Code for listed companies, 2015

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Raising CG Practices with ASEAN CG Scorecard

ASEAN CG
Scorecard

Improving Encouraging
Enhancing CG
Compliance with Voluntary Adoption
Rules/Standards
Rules/Standards of CG Practices

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 STRUCTURE OF THE ASEAN CG SCORECARD, 2017
There are two levels to the ASEAN CG Scorecard

Level 1
Has five major sections that corresponds
to the OECD Principles Level 2
Two additional Sections
Bonus & Penalty
Part A: Right of Shareholders (21)
Part B: Equitable Treatment (15) (13) Bonus items for companies
Part C: Role of Stakeholders (13) that go beyond minimum standards (30)
Part D: Disclosure & Transparency (32) (25) Penalty items for companies with
Part E: Responsibilities of the Board (65) poor practices (-58)

Total no. of items /descriptors (146) Total bonus and penalty items (38)
Total no of items/ descriptors (185) Total bonus and penalty items (34)TToo

Please do not distribute without

IICD's permission

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Indonesia - Overall Mean CG Score: Weighted
Score (2015 – 2019)

Please do not distribute without

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IICD's permission
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 Charter of Corporate Governance

06
– An Example

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 Charter of Corporate Governance
Charter consist of : 3. THE BOARD OF COMPANY
3. THE BOARD OF COMPANY
1. INTRODUCTION 3.1. Role and Responsibilities
3.1. RoleTerms
3.1.1. and Responsibilities
of reference
1.1. Company’s values 3.1.1. Terms of executive
3.1.2. Role of the reference and non-executive Directors
1.2. Brief presentation of company 3.1.2. Role of
3.2. Composition of the
the executive
Board and non-executive Directors
3.2. Composition
3.2.1. Compositionof the Board
2. COMPANY SHARES AND SHAREHOLDERS 3.2.1. Composition
3.2.2. Appointment of Directors
3.2.2.
3.2.3. Appointmentofofthe
Independence Directors
Directors
2.1. Capital and Shares 3.2.3. Independence of
3.2.4. Duration of mandates andthe Directors
age limit
2.1.1. Capital 3.2.4. Duration of mandates and
3.2.5. Procedure for appointment, renewalage limitof terms and training
2.1.2. Shares 3.2.5.
3.2.6. Procedure for
Chairmanship andappointment, renewal of terms and training
Vice-Chairmanship
2.2. Shareholders and shareholders structure 3.2.6. Chairmanship and
3.2.7. Secretary of the Board Vice-Chairmanship
2.2.1. Notifications pursuant to the law on the disclosure of large 3.2.7. Secretary
3.3. Functioning of the ofBoard
the Board
shareholdings 3.3. Functioning
3.3.1. Frequency of the Board
2.2.2. Notifications pursuant to the law on public takeover bids 3.3.1.
3.3.2. Frequency
Preparation
2.3. General Meetings of Shareholders 3.3.2.
3.3.3. Preparation
Procedure, quorum and deliberation
2.3.1. Venue and date 3.3.3. Procedure, quorum and deliberation
3.3.4. Conflicts of interest
2.3.2. Agenda of the General Meeting of Shareholders 3.3.4.
3.3.5. Conflicts of interest
Confidentiality
2.3.3. Procedure for convening meetings 3.3.5. Confidentiality
3.3.6. Minutes and excerpts
2.3.4. Admittance to the General Meeting of Shareholders 3.4. Representation ofand
3.3.6. Minutes UCBexcerpts
2.3.5. Procedure 3.5.3.4. Representation
"Assessment" of UCB
of the Board
2.4. Rights to dividends 3.5. "Assessment" of the
3.6. Remuneration for the DirectorsBoard
2.4.1. Dividend policy 3.6. Remuneration for the Directors
2.4.2. Dividends 3.6.1. Remuneration policy
2.4.3. Interim dividends 3.6.1.
3.6.2. Remuneration
Basic remuneration policy
of Directors and presence fees
2.5. Relations with shareholders 3.6.2.
3.6.3. Basic
Board remuneration
Committees of Directors
members and presence fees
remuneration
2.6. Information for shareholders 3.6.3. Board Committees members remuneration

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 Charter of Corporate Governance
4. BOARD COMMITTEES 5.3. Functioning of the Executive Committee
4.1.4.Common
BOARD Committee
COMMITTEES rules (length of term, organization) 5.3. Functioning of the Executive Committee
4.1. Common Committee rules (length of term, organization)
4.2. Audit Committee 5.4. Remuneration of the members of the Executive Committee
4.2. Audit Committee 5.4.5.4.1.
Remuneration of the
Remuneration members of the Executive Committee
Policy
4.2.1. Terms of reference 5.4.1.
5.4.2. Remuneration
Disclosure Policy
of remuneration
4.2.1.
4.2.2. Terms of reference
Composition of the Audit Committee 5.4.2. Disclosure of remuneration
4.2.2. Composition of the
4.2.3. Functioning of the Audit
Audit Committee
Committee 6. EXTERNAL AUDIT
4.2.3. Functioning
4.3. Governance, of the&Audit
Nomination Committee Committee (GNCC)
Compensation 6. EXTERNAL AUDIT
4.3.4.3.1.
Governance, Nomination & Compensation Committee (GNCC)
Terms of reference
4.3.1.
4.3.2. Terms of reference
Composition of the GNCC 6.1. Roles and responsibilities of the External Auditor(s)
4.3.2. Composition of the GNCC 6.1. Roles and responsibilities of the External Auditor(s)
4.3.3. Functioning of the GNCC
4.3.3. Functioning 6.2. Appointment of the External Auditor(s)
4.4. Scientific Committeeof the GNCC 6.2. Appointment of the External Auditor(s)
4.4.4.4.1.
Scientific
Terms Committee
of reference
4.4.1. Terms of reference 6.3. Independence of the External Auditor(s)
4.4.2. Composition 6.3. Independence of the External Auditor(s)
4.4.2.
4.4.3. Composition
Functioning
4.4.3. Functioning 6.4. Remuneration of External Auditor(s)
6.4. Remuneration of External Auditor(s)
5. THE EXECUTIVE COMMITTEE
5. THE EXECUTIVE COMMITTEE 7. RULES OF BUSINESS CONDUCT AND ETHICS
5.1. Role and Responsibilities of the Executive Committee 7. RULES OF BUSINESS CONDUCT AND ETHICS
5.1. Role and Responsibilities of the Executive Committee
5.1.1. Terms of reference 7.1. Conflict of Interests rules
5.1.1. 7.1. Conflict of Interests rules
5.1.2. TheTerms
Chairofofreference
the Executive Committee
5.1.2. The Chair of the Executive Committee 7.2. Confidentiality of inside information
7.2. Confidentiality of inside information
5.2. Composition of the Executive Committee
5.2.5.2.1.
Composition
Duration ofofmandates
the Executive Committee
and age limit 7.3. Private investment transactions and trading in UCB’s shares
5.2.1. Duration of mandates and age limit 7.3. Private investment transactions and trading in UCB’s shares
5.2.2. Criteria for appointment and assessment
5.2.2.
5.2.3. Criteria for
Procedure for appointment
appointment and
and assessment
renewal
5.2.3. Procedure for appointment and renewal
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 An example Charter of Corporate Governance

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References
• IICD, 2019, Results of ASEAN CG Scorecard Assessment
• Mallin (2018) Chapters 2, Chapter 8, third edition, Monks & Minow (2008) corporate governance
http://bbagroupb.weebly.com/uploads/1/7/7/4/17745991/corporate_governance.pdf
• Nuryanah, S. and Islam, S., 2015. Corporate governance and financial management:
computational optimisation modelling and accounting perspectives. Springer.
• OECD (2015), Overview of the Principles
• https://www.ucb.com/_up/ucb_com_ir/documents/20180426%20-
%20Corporate%20Governance%20Charter.%20docx.pdf

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Email: siti.nuryanah@ui.ac.id

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