Over the past 30 years, comparative corporate law scholarship has grown into a worldwide industry with a substantial volume of publications. For an English-speaking scholar, it has become easy to follow debates in (mainly Western) Europe, Japan, China, India, and Brazil, just to name a few hotspots of the field. Indonesia is often overlooked in the literature, which is surprising, given that it is the fourth largest country in the world by population and its status as a Member of the G20 and an Upper-Middle-Income economy (in fact, the seventh largest economy by GDP/PPP).
Royhan Akbar, Nathanial Mangunsong, and Dan W. Puchniak’s forthcoming article, The Abolition of Independent Directors in Indonesia: Rationally Autochthonous or Foolishly Idiosyncratic, is one of very few filling this gap. What at first glance seems like a peculiar development—the abolition of the requirement for publicly traded companies to have independent directors—reveals many parallels to other countries upon closer investigation, which allows the authors to make important points that reveal structural features of comparative corporate governance beyond the country.
As the article describes, Indonesian company law has its roots in the Dutch colonial period. The 1994 codification shows some residual influence of this legal origin, as it reaffirmed what some might call a two-tier board structure comprising a board of directors and a separate board of commissioners. Following the Asian financial crisis of the late 1990s, the IMF pushed Indonesia toward corporate governance reforms, which included independent directors. These were enshrined, partly as recommendations and partly as requirements, in the Indonesian Corporate Governance Code and the Jakarta Stock Exchange (JSE)’s listing rules in the early 2000s. After the repayment of the IMF loans, the Corporate Governance Code began to omit the recommendation in 2006, while the JSE’s requirement of a single independent director was abolished in 2018.
The development illustrates several historical patterns in comparative corporate governance. In the early 1990s, Indonesia’s “legal origins” seemed to be its most important driving force. In the late 1990s, under pressure from the IMF, the country’s evolution illustrates the period of convergence in corporate governance, with independent directors being a significant example of the adoption of classic elements of “good” corporate governance from a US and UK perspective. Convergence is soon followed by divergence in the form of reversion to its old patterns.
Another remarkable point is that independent directors were always a legal transplant that did not provide a good fit for the Indonesian corporate governance system, given its economic and legal institutions. First, independent directors emerged in response to the agency problem between managers and shareholders, prevalent under conditions of dispersed ownership in the US and the UK. Here, outsiders not beholden to management may be able to monitor on behalf of outside investors. In a system where controlling shareholders are typical, as in Indonesia (and most countries around the world), any director will find it difficult to assert their independence against a controlling family or government entity that completely dominates corporate affairs. In this situation, the institution may remain an attempt to market a corporate governance system to international investors, or to alleviate outside pressures from an international institution with a problematic one-size-fits-all perspective, such as the IMF or World Bank. For this phenomenon, the article uses the term “halo signaling,” which was coined by Dan Puchniak in earlier work.
The article also highlights that independent directors have all but disappeared from Indonesia since 2018, but that “independent commissioners” remain. In this respect, the authors provide useful comparisons to other “two-tier” systems. Notably, Dutch and German supervisory boards are more powerful than the Indonesian board of commissioners, due to their more strategic role and their authority to elect and remove management board members. Chinese and Japanese boards (in the latter case sometimes called “board of auditors”) have a more limited role focused on specific aspects of monitoring, which is why they are a better comparison for the Indonesian system, where the members of both boards are elected by shareholders. Parts of the literature consider the “board of auditors” model prevailing in Italy, Portugal, and Japan to be a third model besides the classic “one-tier” and “two-tier” ones. By contrast, the Anatomy of Corporate Law describes it as a modified one-tier model. Tellingly, the German discussion on independent directors was always focused on the supervisory board, and the issue of independent members of the management board was never even considered. It would probably be most appropriate to analogize the supervisory board in a two-tier system to the board of directors in the US one-tier system, and the management board to corporate officers.
Akbar et al.’s paper, therefore, leaves a lot of food for thought. In addition to these larger systemic points, it provides a wealth of detail on Indonesian corporate governance on the ground, informed by a set of semi-structured interviews conducted by the authors with independent commissioners. The paper concludes with a set of thoughtful recommendations for possible reforms in Indonesia. These focus on strengthening the representation of minority shareholders, policing related-party transactions, and mitigating the influence of politics.
Overall, the article is a highly rewarding read for anyone interested in comparative corporate governance. It opens a window into a relatively little-discussed part of the world, and at the same time, manages to raise important points of general significance for the field.
