Session 5:

BOARD COMMITTEES AND COMPOSITION

Indonesian Entrepreneurs 
Organization

Corporate Governance Workshop
20 October 2015
 AGENDA

AGENDA
1. Introduction
2. Board Member Duties 
3. Structure of Board Committees
4. Board Composition
5. Corporate Secretary

‹#› IFC – Morris Rasik Corporate Governance

 Introduction

Board of Board of
Directors Commissioners

Finance Operation
Management Management
Other Audit
Committee Committee
s
Risk Other
Management Managements Interna External
l Audit Audit

‹#› IFC – Morris Rasik Corporate Governance

 Introduction

Western
Model
“Proponents of the “Western Model”
want that a majority (and even all) of
the members of the Committee be
independent directors
(commissioners).”
BOARD
COMMITTEES
Asian
MODEL Model
“Sponsors of the “Asian Model” believe
that a strong CEO and a supportive
Board whose directors
(commissioners) are more well-
connected than independent are
better means of protecting minority
shareholders.”

‹#› IFC – Morris Rasik Corporate Governance

 Board Member Duties

‹#› IFC – Morris Rasik Corporate Governance

 Board Member Duties

What role do the Boards play?
Are board members clear on their individual duties?

‹#› IFC – Morris Rasik Corporate Governance

 Board Member Duties

Company Law No. 40/2007
Article 108
Board of Commissioners 

“The BOC shall oversee the management policy and 
process in general, and provide advise to BOD. The 
oversight and supervision are always carried out in 
the company’s interest and in line with the 
company’s vision and mission.”

‹#› IFC – Morris Rasik Corporate Governance

Fiduciary Duties of Individual Board 
Member:  Care & Loyalty

The member of the board  The member of the board 
shall exercise duty of  shall exercise duty of 
care to the company. loyalty to the company.

‹#› IFC – Morris Rasik Corporate Governance

 Defining the Duty of Care

Board members shall discharge their duties:
 In good faith,
 In a manner they reasonably believe to be in the best interests of the corporation, and
 In compliance with the company’s code of conduct (if the company does not have a 
code, it should adopt one)

Compliance with the standard of care can be defined as:
 The obligation of a board member to make reasonable inquiry, and  
 Taking a decision after reasonable discussion

‹#› IFC – Morris Rasik Corporate Governance

 Defining the Duty of Loyalty

Board members shall discharge their duties by:

 Ensuring that their own interests do not prevail over those of the company
and its shareholders

 Keeping information confidential

 Avoiding or managing conflicts of interest

‹#› IFC – Morris Rasik Corporate Governance

 Structure of the Board Committees

‹#› IFC – Morris Rasik Corporate Governance

 Board Committee Structure

What is the most effective board committee structure?

‹#› IFC – Morris Rasik Corporate Governance

 The composition and structure of the board is of primary 
importance for its quality and efficiency, and significantly 
affects the overall performance of the company. 

! Nota bene: Independence is not a panacea.  The right mix‐of‐skills, 

teamwork, leadership and board processes will ultimately determine  !
good board practice

‹#› IFC – Morris Rasik Corporate Governance

Sample Committees – Depends on 
Each Company
Audit
Most Boards should have an Audit Committee
Committee
Risk Oversight Critical in Financial Institutions
Committee

Nominations
Committee It may be more practical to combine these  and/or  
Remunerations add Corporate Governance oversight
Committee
Governance Usually set up first before all other committees;
Committee Task to help set up other board committees
Strategy/Product
Can take different forms; not necessarily a board committee
Committee
Ad Hoc
Committees
‹#› IFC – Morris Rasik Corporate Governance
Board Structure: Option 1

Shareholders
Chairman

Board of Commissioners
Audit &
Risk Oversight Committee
Company Secretary
Ad hoc Committees

BOD / Chief Executive Officer

Management Team

‹#› IFC – Morris Rasik Corporate Governance

 Audit Committee Relationship with
Internal and External Auditor

AUDIT COMMITTEES
NEED TO HAVE:
• To be the appropriate body to
approve the plans and programs
Access to the information of action that the internal and
external auditors propose, and
• To monitor their execution and
The right amount of time
implementation.

Access to the auditors

Access to experts

Continuing education

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What is an audit committee?
• The Audit Committee is a Board committee. It is
created by the Board of Commissioners that ensures
its independence so it can effectively carry out its audit
and oversight functions over management, in behalf of
the Board of Commissioners who has fiduciary duties
to shareholders and other stakeholders as well.
• Thus, its members should have the necessary
independence of mind and judgment. They are
expected to have financial literacy and relevant
expertise.
What are its duties and responsibilities?
• The main duty of the Audit Committee is to
act in behalf of the entire Board of
Commissioners in ensuring that the audit
duty of the Board is faithfully, competently,
and diligently discharged.
• In carrying out this duty, it hires external
auditors, supervises the work of the internal
auditors.
• It also works closely with top management to
ensure that all control and reporting
mechanisms are in place and operational in
line with professional and ethical standards.
 Audit Committee Functions and Duties

Audit committees are required mainly to help

ensure that the BOC would live up to one of its
core functions, that of installing a financial
control and reporting system
Ensure that the financial statements
about the company are true and fair;

Proper identification and management of

risks.

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Board Structure: Option 2

Shareholders
Chairman

Board of Commissioners

Audit Committee Risk Oversight Committee
Company Secretary
Ad hoc Committees

BOD / Chief Executive Officer

Management Team

‹#› IFC – Morris Rasik Corporate Governance

 Audit Committee
Roles and Responsibilities
» Appoints the external auditor and oversees the company’s relation with them
» Recommends the audit fee to the Board and approves any non‐audit services
Relationship with 
provided by the external auditor
External audit » Discusses with the external auditor, the nature and scope of the audit and reviews the
auditors quality control mechanisms
» Monitors and reviews the activities of internal audit
» Ensures that the Internal audit is adequately resourced and has sufficient standing
Internal audit 
within the company
function » Maintains the independence of IA and provides necessary resources
» Considers management response to IA recommendations

Internal control and  » Maintains a comprehensive Internal control (IC) framework

risk management » Ensures the presence of a risk management policy document

» Reviews significant reporting issues and accounting policies

» Reviews company’s semi‐annual and annual financial statements
Reporting and 
» Reviews formal announcements made to the shareholders
ongoing review » Reviews primary regulatory returns filed and disclosures made by the company
» Reviews the going concern assumption of the company

‹#› IFC – Morris Rasik Corporate Governance

 Risk Oversight Committee – Key Roles
» Review and oversight of the risk profile / all types of risk (e.g. credit, operational
& other risks)
» Making recommendations to the Board on risk appetite and RM practices
Risk Governance » Recommending changes to policies and procedures
» Periodically reporting to the Board (at least annually)
» Assessment of the overall effectiveness of the RM framework
» Communicating risk implications of strategic decisions made by the Board
» Approving the compliance policy and the compliance function’s charter
» Ensuring compliance to all applicable laws and regulations
Compliance
» Establishing and monitoring a permanent and effective internal compliance
function
» Reviewing key risk reports and present to the Board
Monitoring » Reviewing and reporting significant risk issues highlighted by BUs and IA
» Reviewing exception reports and developing corrective actions

» Recommends appropriate risk disclosures to the Board

Disclosures
» Validates the disclosures against applicable regulations

‹#› IFC – Morris Rasik Corporate Governance

 Key elements of Control Environment
What to Look For
Board 
Oversight

Planning and 
Compliance Control Environment
Monitoring

Risk  Internal Control 
External Audit Internal Audit Activities
Management

Information and  HR/IT 
Communication Functions
 Risk Oversight Committee

- May be combined with the board Audit

Committee if the board has limited financial
expertise;

- Relates to the Internal Audit Committee for

source of information;

- Has a complex role because markets move

quickly and the nature of each type of risk
becomes more complex.

29
 Risk Oversight Committee

Regulators

RO Committee BOC

Pres. Director

CRO Internal Audit

Management

30
 Risk management is far from risk
avoidance.

In general, in an open market

competition, the essence of
business is taking risks.

31
 For entrepreneurship that works
for growth and development,
taking risks is essential.

32
 However, risks need to be
managed properly and
prudently, and the dangers that
risk brings with it need to be
mitigated and where possible
avoided.

33
 Moreover, it is the responsibility
of the Board of Directors or
management to manage risks.

The Board of Commissioners is

there to oversee and help
ensure that in fact risks are
managed.

34
 The Board of Commissioners
recognizes that the company’s
response to risk and crisis
(potential or actual) is
FOUNDED upon
good corporate
governance.

35
 Under ordinary circumstances, it is
increasingly common to SEPARATE positions
of Chairman and President Director.

36
 The former should focus on governance, and
the latter on management.

Where the same person holds both positions,

an independent governance committee
should be set up. This is normally chaired by
an independent commissioner.

37
 SKILLS REQUIRED OF THE BOARD FOR RISK OVERSIGHT

38
 ROC’s membership

The two most important qualities which any

risk oversight committee must have are
independence and authority

Possible members: company legal counsel,

compliance officer, chief financial officer, risk
manager

39
 Skills required of the board for risk oversight

 Commisioners need to be risk-minded in the

reviewing several things, such as:

Financial reports

Operations in general

Operation in the context of the

company’s shareholder

Compliance system

40
Board Structure: Option 3

Shareholders
Chairman

Board of Commissioners

Audit & Risk Committee Governance Committee
Company Secretary
Ad hoc Committees

BOD / Chief Executive Officer

Management Team

‹#› IFC – Morris Rasik Corporate Governance

 Governance Committee

 Focus areas:
Nominations: Chooses the candidates for director and CEO; 
Nomination reviews and approves other senior appointments
Function Evaluation and training: Organizes or carries‐out board 
evaluation; conducts performance appraisals of directors 
and senior management
Succession planning: For CEO, chairman and other directors.
Increasingly handles “corporate governance” issues

 Focus areas:
 Considers matters relating to non‐executive and executive 
Remuneration remuneration
Function  Approves changes to incentive and benefits plans 
applicable to senior managers

‹#› IFC – Morris Rasik Corporate Governance

 Board Composition

‹#› IFC – Morris Rasik Corporate Governance

 Board Composition

What is the ideal board size and composition?

‹#› IFC – Morris Rasik Corporate Governance

Considerations for Board Composition

Type: Executive - Non-Executives - Independents

Experience: Industry (Microfinance) – Geographical - Market

Subject Expert: Financial - Risk - Legal - Other

Personal Attributes: Leaders – Tacticians

Diversity: Age – Gender - Cultural

View Points: Risk Adversity – Differing Perspectives

Other Value Added: Business Contacts – Reputation

‹#› IFC – Morris Rasik Corporate Governance

 Important Board Member Qualifications

Personal Characteristics Competencies

• Leadership • Industry Experience
• Integrity • Business Judgment
• Accountability • Education/Special Skills, for 
• Maturity example:
• Work Ethic - Finance and Accounting;
• Time - Microfinance
• Courage - Risk Management and Internal 
Control; or
- Strategic Management.

‹#› IFC – Morris Rasik Corporate Governance

 Board Composition

The board would be constituted of 5 to 9 members with a proper mix of 
skills.  It will comprise a mix of non‐executives and independents (as 
possible) and appropriate representation from the various shareholders.   

Alternatives
5 board members 7 board members
2-3 from controlling 3-4 from controlling
shareholders shareholders
2-3 from minority 3-4 from minority
shareholders or Independent shareholders or Independent

‹#› IFC – Morris Rasik Corporate Governance

 Sample Independence Definition

Independence criteria: 

The individual would NOT be considered independent if he/she: 
 has been an employee of the company or group within the last five years;

 has, or has had within the last three years, a material business relationship with the company either 
directly, or as a partner, shareholder, commissioner, director, or senior employee of a body that has 
such a relationship with the company;

 has received or receives additional remuneration from the company apart from a commissioner’s fee, 
participates in the company’s share option or a performance‐related pay scheme, or is a member of 
the company’s pension scheme;

 has close family ties with any of the company’s advisers, commissioners, directors or senior employees;

 represents a significant shareholder; or

 has served on the board for more than nine years from the date of their first election.

‹#› IFC – Morris Rasik Corporate Governance

 What are the key skills for Board members?

» Financial expertise, including knowledge of finance, accounting and audit

» MFI Industry experience, which is useful in identifying industry trends and 
developments and in guiding management in setting strategy

» Risk management expertise

» Other specialty areas may include legal expertise or organizational & HR 
development

» Gender diversity on the board as women can offer fresh insights and 
approaches to issues.

‹#› IFC – Morris Rasik Corporate Governance

 Corporate Secretary

‹#› IFC – Morris Rasik Corporate Governance

 Corporate Secretary

How do you envisage the Corporate Secretary function?

‹#› IFC – Morris Rasik Corporate Governance

 The Overall Role of the Corporate Secretary
in Ensuring Good Corporate Governance

Ensures the development of, compliance with and periodic review 
of the company’s governance policies and practices 

Supports the Board: 
Ensures that the 
by organizing Board 
company discloses 
meetings, channeling 
material information 
The Corporate Secretary information to and 
on a timely basis and 
from the Board, and 
in a transparent 
advising on corporate 
manner 
governance 

Protects shareholder rights by organizing a proper GMA, liaising 
during control transactions, and helping to resolve conflicts of 
interest 

‹#› IFC – Morris Rasik Corporate Governance

 Qualification of the Corporate Secretary

 Full time officer of the company

 Function can be combined with head of legal

 Professional qualifications (not an assistant!)

 Reputation 

‹#› IFC – Morris Rasik Corporate Governance

‹#› IFC – Morris Rasik Corporate Governance