Presentation, Analysis and Interpretation of Data: Part A - Rights of Shareholders (N 30)

56
CHAPTER IV
PRESENTATION, ANALYSIS AND INTERPRETATION OF DATA
This chapter presents the results of the collection and analysis of data made by the
researchers. The first section describes the information derived from the assessment of each part
of the ASEAN Corporate Governance Scorecard that are the rights of shareholders, equitable
treatment of shareholders, role of stakeholders, transparency and disclosure, responsibilities of
the board. Through descriptive statistics, those variables were analyzed. The second section
presents, interprets and analyzes the data for Return of the Equity of various Indonesian
companies. These companies represent different industries in Indonesia and the global average
ROEs of each industry. The third section presents the results developed from cross analysis using
linear regression for correlation analysis.
I. Corporate Governance Practices
Table 2
Part A Rights of Shareholders
(N=30)
YES
#
%
NO
#
%
N/A
#
%
A.1 Basic Shareholder Rights (Average)
29
97%
3%
0%
30
Does the company pay (interim and final/annual) dividends in

an equitable and timely manner; that is, all shareholders are
treated equally and paid within 30 days after being (I)
declared for interim dividends and (ii) approved by
shareholders at general meetings for final dividends?
29
97%
3%
0%
30
A.5 Active participation of shareholders in

a general meeting. (Average)
20
67%
10
33
%
0%
30
Does the Company publicly disclose policy/practice to

encourage shareholders including institutional shareholders to
attend the general meetings or engagement with the
Company?
20
67%
10
33%
0%
30
CLUSTER
TOTAL
57
A.2 Participation of shareholders in

decision making (Average)
30%
13
43
%
27
%
30
Amendments to the company's constitution?
14
47%
16
0%
53%
30
The authorisation of additional shares?
23%
23
10%
67%
30
The transfer of all or substantially all assets, which in effect

results in the sale of the company?
20%
0%
24
80%
30
A.3 Effective voting procedures in a general

shareholder meeting (Average)
27%
14
46
%
27
%
30
Did the company organise their most recent AGM in an easy

to reach location?
24
80%
0%
20%
30
Does the company allow shareholders to elect

directors/commissioners individually?
20
67%
10%
23%
30
Does the disclosure of the outcome of the most recent AGM

include resolution(s)?
20
67%
17%
17%
30
Do shareholders have the opportunity, evidenced by an

agenda item, to approve remuneration (fees, allowances,
benefit-in-kind and other emoluments) or any increases in
remuneration for the non-executive directors/commissioners?
19
63%
23%
13%
30
Does the company provide the rationale and explanation for

each agenda item which require shareholders approval in the
notice of AGM/circulars and/or the accompanying statement?
16
53%
30%
17%
30
Does the company disclose the voting results including

approving, dissenting, and abstaining votes for each agenda
item for the most recent AGM?
10
33%
20
67%
0%
30
Did the chairman of the board of directors/commissioners

attend the most recent AGM?
23%
23
77%
0%
30
Did the CEO/Managing Director/President attend the most

recent AGM?
23%
23
77%
0%
30
Does the company disclose that it has appointed an

independent party (scrutinizers/inspectors) to count and/or
validate the votes at the AGM?
12%
18
60%
17%
30
Does the company disclose the list of board members who

attended the most recent AGM?
20%
23
77%
3%
30
Does the company make publicly available by the next

working day the result of the votes taken during the most
recent AGM for all resolutions?
17%
15
50%
10
33%
30
Does the company disclose the voting and vote tabulation

procedures used, declaring both before the meeting proceeds?
13%
21
70%
17%
30
Do the minutes of the most recent AGM record that there was
an opportunity allowing for shareholders to ask questions or
raise issues?
13%
13%
22
73%
30
Did the chairman of the Audit Committee attend the most

recent AGM?
10%
27
90%
0%
30
Do companies provide at least 21 days notice for all

resolutions?
10%
0%
27
90%
30
Does the company provide non-controlling shareholders a

right to nominate candidates for board of
directors/commissioners?
7%
93%
28
93%
30
58
Did the company vote by poll (as opposed to by show of
hands) for all resolutions at the most recent AGM?
3%
0%
29
97%
30
Do the minutes of the most recent AGM record questions and

answers?
0%
0%
30
100%
30
Does the company allow for voting in absentia?
0%
7%
28
93%
30
A.4 Corporate control in the fairness of the

transaction price (Average)
10%
0%
27
90
%
30
In cases of mergers, acquisitions and/or takeovers requiring

shareholders approval, does the board of
directors/commissioners of the offeree company appoint an
independent party to evaluate the fairness of the transaction
price?
10%
0%
27
90%
30
23
32%
7
(Note: N/A represents also those data that cannot be obtained)
30
8
32
%
205
27
%
750
TOTAL (Overall)
Table 2 pointed out that 97% of 30 publicly listed companies in Indonesia complied with
the practice of paying back its shareholders in an equitable and timely manner. This might due to
the requirement stated under the Indonesian Company Law that all net profits, after the
deduction to be set aside as reserves, shall be allocated to the shareholders as dividends unless
determined otherwise in the General Meeting of the Shareholders. Moreover, according to a
study by Baker & Powell (2012), evidence shows that managers of Indonesian firms perceive
that dividend policy affects firm value. Managers seem to agree that multiple theories including
signalling, catering, and life cycle explanations help to explain why their firms pay dividends.
Most Indonesian publicly listed companies encourage active participation of
shareholders including institutional shareholders in a general meeting and in the decision
making of the company. However, actual participation by shareholders in important company
matters needing centralized decision making still needs to be reinforced as is evidenced by a
low percentage of companies complying with such indicator in the OECD Scorecard. This is the
case notwithstanding the fact that a provision in the Indonesian Company Law states that the
59
GMS of a limited liability company is a company organ given the authority which is not
granted to the Board of Directors and Board of Commissioners within the limits determined by
the ICL and/or the AoA. All ordinary shareholders have the right to participate in the GMS. The
GMS approves nominations for the Board of Commissioners and the Board of Directors
membership. In addition, it approves the annual report and the financial statements, the
distribution of profits and losses (including the payment of dividends), amended authorized
capital, amendments of the AoA, re-organization and dissolution, and extraordinary transactions
(Indonesian Company Law, 2007).
Eighty percent (80%) of the companies often organize their most recent AGM in an easy
to reach location pursuant to Article 76 of the Indonesian Company Law which specifically
mandates that GMS be convened at the domicile of the Company or at a location of business
activities of the Company as stipulated in the articles of association. However, only 67% of the
companies allow shareholders to elect directors/commissioners individually. Few have
implemented effective voting procedures during annual general meeting. Sixty-seven percent
(67%) out of 30 companies provide disclosure of the outcome of the most recent AGM include
resolution and also the rationale and explanation for each agenda item which require
approval in the notice of AGM/circulars and/or the accompanying statement. They give
opportunities to their shareholders to approve remuneration or any increases in remuneration for
the non-executive directors/commissioners.
Only ten percent (10%) out of 30 companies appoint an independent party to evaluate
the fairness of the transaction while this is not applicable for the rest of the companies with
mergers, acquisitions and other business combinations being uncommon in Indonesian
companies.
60
There are no data available regarding the companys votation process for all the
resolutions and the votation through absentia. It is to be noted, however, that under Article 85
of the Indonesian Company Law, shareholders, either severally or represented based on a
power of attorney, shall have the right to attend the GMS. This aspect of the voting procedures
in a GMS, therefore, needs close attention and improvement in order to conform to regulatory
provisions.
Overall, thirty-two percent (32%) of the companies have complied with this particular
category of the OECD Scorecard. Accordingly, the Asian Development Bank (ADB) and
ASEAN Capital Market Forum assessed that for Indonesian companies, shareholders have
clear rights to participate in decision making concerning fundamental corporate changes and
have the right to approve the remuneration of members of the boards. Also, AGMs are
regularly held in accessible and places nearby corporate offices. However, results pertaining to
the minutes of AGMs and announcement of AGM results were poor, including the disclosure
of questions and answers, and resolutions during AGMs. Voting results and list of attendance
are not usually disclosed. Additionally, voting is used poorly in the decision-making process.
Table 2 above presents consistent result with that of the ADB and ASEAN Capital Market
Forum.
61
Table 3
Part B Equitable Treatment of Shareholders
(N=30)
Cluster
B.1 Shares and voting rights (Average)
YES
#
%
95
29
%
NO
#
%
2
0.5
%
N/A
#
%
TOTAL
3%
30
Do the company's ordinary or common shares have one vote

for one share?
29
97%
0%
3%
30
Where the company has more than one class of shares, does
the company publicise the voting rights attached to each
class of shares (e.g. through the company website / reports/
the stock exchange/ the regulator's website)?
28
93%
3%
3%
30
B.5 Protect minority shareholders from

abusive actions (Average)
25
82
%
1.7
6
%
3.7
12
%
30
Were there any RPTs that can be classified as financial

assistance to entities other than wholly-owned subsidiary
companies?
26
87%
10%
3%
30
Does the company disclose that RPTs are conducted in such

a way to ensure that they are fair and at arms' length?
26
87%
7%
7%
30
In case of related party transactions requiring shareholders

approval, is the decision made by disinterested shareholders?
22
73%
0%
27%
30
B.2 Notice of AGM (Average)
22
75
%
2.1
7
%
5.4
18
%
30
Does each resolution in the most recent AGM deal with only
one item, i.e., there is no bundling of several items into the
same resolution?
29
97%
3%
0%
30
Are the companys notices of the most recent AGM/circulars

fully translated into English and published on the same date
as the local-language version?
28
93%
3%
3%
30
Is the amount payable for final dividends disclosed?
25
83%
7%
10%
30
Were the proxy documents made easily available?
25
83%
3%
13%
30
Has an explanation of the dividend policy been provided?
24
80%
10%
10%
30
Are the profiles of directors/commissioners (at least age,

academic qualification, date of first appointment,
experience, and directorships in other listed companies) in
seeking election/re-election included?
21
70%
13%
17%
30
Are the auditors seeking appointment/re-appointment clearly

identified?
17%
10%
22
73%
30
17
58
%
1.8
6
%
11
37
%
30
B.4 Related party transactions by

directors and key executives (Average)
62
Does the company have a policy requiring directors
/commissioners to disclose their interest in transactions and
any other conflicts of interest?
24
80%
17%
3%
30
Does the company have a policy requiring board members

(directors/commissioners) to abstain from participating in
the board discussion on a particular agenda when they are
conflicted?
19
63%
3%
10
33%
30
Does the company have policies on loans to directors and

commissioners either forbidding this practice or ensuring
that they are being conducted at arm's length basis and at
market rates?
17
57%
33%
12
40%
30
Does the company have a policy requiring a committee of

independent directors/commissioners to review
material/significant RPTs to determine whether they are in
the best interests of the company and shareholders?
30%
0%
21
70%
30
2.5
8%
0
%
28
92
%
30
Does the company have policies and/or rules prohibiting

directors/commissioners and employees to benefit from
knowledge which is not generally available to the market?
17%
0%
25
83%
30
Are the directors / commissioners required to report their

dealings in company shares within 3 business days?
0%
0%
30
100%
30
36
2
67
%
28
5
%
150
28
%
540
B.3 Insider trading and abusive selfdealing should be prohibited (Average)
TOTAL (Overall)
Table 3 shows that 95% of the companies featured one vote for one share and publicized
the voting rights attached to each class of shares in case there is more than one class of shares.
Furthermore, majority of Indonesian companies disclose that related party transaction are
conducted in such a way to ensure that they are fair and at arms' length and the decision is made
by disinterested shareholders in case related party transactions require shareholders approval.
However, identical to the statement of Asian Development Bank, relative to other principles, the
proper disclosure of related party transactions and the policies in dealing with such is still one of
the lowest in Part B Equitable Treatment of Shareholders.
63
Several Indonesian publicly listed companies have complied also with respect to
notifying the shareholders for the Annual General Meeting (AGM) specifically on the details of
the notice and the manner of notifying the shareholders. Contrary to ADBs findings, the
corporate governance principle relating to the proper notification of AGMS fairly got a good
score ranking 2nd among the principles of Equitable Treatment of Shareholders.
The researchers have noted that the information regarding the prohibition of insider
trading is not accessible, also contrary to ADBs findings. It received the lowest rating in the
bracket, opposite to ADBs results which showed that Indonesian companies disclose policies
relating to the prohibition of key personnel and commissioners benefiting from insider trading. In
the overall, sixty-seven percent (67%) have complied with the practices for treating shareholders
equally.
64
Table 4
Part C Role of Stakeholders
(N=30)
Cluster
YES
NO
N/A
TOTAL
C.2 Stakeholders opportunity to redress

for violation of rights. (Average)
30
100
%
0%
0%
30
Does the company provide contact details via the

company's website or Annual Report which stakeholders
(e.g. customers, suppliers, general public etc.) can use to
voice their concerns and/or complaints for possible
violation of their rights?
30
100%
0%
0%
30
C.3 Develop performance-enhancing

mechanisms for employee participation
(Average)
20
68%
28%
4%
30
Does the company have training and development

programmes for its employees?
25
83%
17%
0%
30
Does the company publish relevant information on training

and development programmes for its employees?
23
77%
17%
7%
30
Does the company explicitly disclose the health, safety, and

welfare policy for its employees?
22
73%
27%
0%
30
Does the company publish relevant information relating to

health, safety and welfare of its employees?
19
63%
23%
13%
30
Does the company have a reward/compensation policy that

accounts for the performance of the company beyond
short-term financial measures?
13
43%
17
57%
0%
30
C.4 Communicate illegal or unethical

practices (Average)
16
53%
30%
17
%
30
Does the company have procedures for complaints by

employees concerning illegal (including corruption) and
unethical behaviour?
18
60%
30%
10%
30
Does the company have a policy or procedures to protect

an employee/person who reveals illegal/unethical
behaviour from retaliation?
14
47%
30%
23%
30
C.1 Respect for rights of stakeholders

(Average)
14
48%
10
32%
20
%
30
65
Elaborates the company's efforts to interact with the

communities in which they operate? (disclosure of policy)
30
100%
0%
0%
30
Does the company have a separate corporate responsibility

(CR) report/section or sustainability report/section?
(disclosure of implementation)
29
97%
3%
0%
30
Interaction with the communities (disclosure of

implementation)
26
87%
13%
0%
30
Stipulates the existence and scope of the company's efforts

to address customers' welfare? (disclosure of policy)
21
70%
30%
0%
30
Customer health and safety (disclosure of implementation)
15
50%
20%
30%
30
Describes the company's efforts to ensure that its value

chain is environmentally friendly or is consistent with
promoting sustainable development? (disclosure of policy)
12
40%
18
60%
0%
30
Environmentally-friendly value chain (disclosure of

implementation)
12
40%
13%
14
47%
30
Explains supplier/contractor selection practice? (disclosure

of policy)
11
37%
18
60%
3%
30
Describe the company's anti-corruption programmes and

procedures? (disclosure of policy)
30%
21
70%
0%
30
Anti-corruption programmes and procedures (disclosure of

implementation)
27%
13%
18
60%
30
Supplier/Contractor selection and criteria (disclosure of

implementation)
23%
23%
16
53%
30
Describes how creditors' rights are safeguarded?

(disclosure of policy)
13%
26
87%
0%
30
Creditors' rights (disclosure of implementation)
7%
23%
21
70%
30
185
29%
95
15%
630
TOTAL (Overall)
350 56%
Table 4 exhibits the results of the tabulation of governance practices for Part C which
consists of four components relating to role of stakeholders. All companies have complied with
the recommended practice of providing the stakeholders the opportunity to obtain effective
redress for the violation of their rights specifically through the provision of contact details in
annual reports or company website. Most of these companies have developed performanceenhancing mechanisms for employee participation that generally relates to the employee welfare.
Statistics show that on average, 68% of the companies have met the practice of providing for the
66
well-being of employees like specifically with respect to health, safety, welfare, training and
development programs and rewards. Every enterprise must apply occupational safety and health
(OSH) management system to protect the safety of the workers and to realize optimal
productivity (Manpower Act No.13, 2003). The cooperation of workers within the enterprise is
vital for the prevention of occupational accidents and diseases. Workers duties in hazard control
have as their counterpart the recognition of certain basic rights, and these should also be reflected
in the enterprise policy. In particular, workers have the right to remove themselves from danger,
and to refuse to carry out or continue work where they have reasonable justification to believe
that continuing such work presents an imminent and serious threat to their life or health
(International Labor Organization). It is evident that majority of the companies have complied
the practice of addressing employee welfare based on this mandate and the corresponding results
of the statistics. Furthermore, a study by Tritch, T. (2003) mentioned that many consultation
agencies believed that there is a correlation between the value of strong employee engagement
and company or institution performance. Employee engagement is an important aspect within an
organization, because employees who feel involved with their organizational goals are expected
to be more productive and be more aware to achieve higher level of contributions to organization
compared with employees who do not possess an engagement value. As a result of this,
companies would have the tendency to pursue the practice of providing for the well-being of
employees. Meanwhile, 53% of the companies have complied with practices relating to
stakeholders being able to freely communicate their concerns about illegal or unethical practices
to the board and where their rights are not being compromised for doing this. Most of the
companies have implemented a whistle blowing system which is a detection mechanism for the
violation of a criminal offense and this serves as the procedures for complaints by employees
67
concerning illegal and unethical behavior and protection for the whistle blower. According to
Halim, Haryanto, Nugroho and Manansang (2013), whistle blowing system is not a new system.
From the observation of researchers, there are several companies in Indonesia which
implement this system. This would justify the results that majority but not all companies have
implemented such system which serves as the guiding procedures for handling complaints by
employees. However, the possibility still exists that Indonesian companies might be indifferent
about the importance of applying this whistle blowing system. Overall, the companies on
average have complied with the majority (slightly over 50%) of the recommended governance
practice.
On the basis of all statistical information reflected in Table 4, it is evident that Indonesian
companies were substantially implementing stakeholder practices. The results were in agreement
with the ASEAN Corporate Governance Scorecard country reports and assessments conducted
by Asian Development Bank and ASEAN Capitals Market Forum that most companies had
policies relating to the interests their stakeholders (specifically the communities, customers and
employees) as well as sustainable development. Providing for opportunities (via contact details
in annual reports or company website) to stakeholders to voice their concerns or complaints;
policies regarding interaction with communities; disclosing separate section for CSR and
conducting training and development programs for its employees tend to have the highest ranks
in terms of yes scores which is consistent with such results.
It can also be confirmed from the tabulations that most companies portray disclosure
insufficiencies when it comes to anti-corruption activities. It is safe to assume that these
companies were still unwilling to engage stakeholders especially the employees in preventing
68
such illegal or unethical practice. Also, according to such country reports and assessments
empirical evidence shows that, in general, the satisfactory implementation of corporate
governance practices is still a big challenge for Indonesian Publicly Listed Companies.
Table 5
Part D Disclosure and Transparency
(N=30)
YES
#
%
NO
#
%
N/A
# %
D.7 Timely filing/ release of annual/

financial reports (Average)
29
98%
2%
0%
30
Are the audited annual financial report / statement released

within 120 days from the financial year end?
30
100%
0%
0%
30
Is the annual report released within 120 days from the

financial year end?
30
100%
0%
0%
30
Is the true and fairness/fair representation of the annual

financial statement/reports affirmed by the board of
directors/commissioners and/or the relevant officers of the
company?
28
93%
7%
0%
30
D.9 Investor relations (Average)
28
93%
7%
0%
30
Does the company disclose the contact details (e.g.

telephone, fax, and email) of the officer / office responsible
for investor relations?
28
93%
7%
0%
30
D.6 Medium of communications (Average)
27
90%
0%
30
Does the company use the following modes of

communication: Company website
30
100%
0%
0%
30

communication: Media briefings /press conferences
30
100%
0%
0%
30

communication: Quarterly reporting
28
93%
7%
0%
30

communication: Analyst's briefing
18
60%
12
40%
0%
30
D.1 Transparent ownership structure

(Average)
26
86%
0%
30
Does the information on shareholdings reveal the identity of

beneficial owners, holding 5% shareholding or more?
22
73%
27%
0%
30
Does the company disclose the direct and indirect (deemed)

shareholdings of major and/or substantial shareholders?
28
93%
7%
0%
30

shareholdings of directors (commissioners)?
26
87%
13%
0%
30
CLUSTER
10% 0
14% 0
TOTAL
69
shareholdings of senior management?
24
80%
20%
0%
30
Does the company disclose details of the parent/holding

company, subsidiaries, associates, joint ventures and special
purpose enterprises/ vehicles (SPEs)/ (SPVs)?
29
97%
3%
0%
30
D.8 Company website (Average)
25
84%
0%
30
Does the company have a website disclosing up-to-date

information on its financial statements/reports (current and
prior years)?
30
100%
0%
0%
30

information on its downloadable annual report?
30
100%
0%
0%
30

information on its materials provided in briefings to analysts
and media?
28
93%
7%
0%
30

information on its shareholding structure?
28
93%
7%
0%
30

information on its business operations?
26
87%
13%
0%
30

information on its notice of AGM and/or EGM?
25
83%
17%
0%
30

information on its minutes of AGM and/or EGM?
24
80%
20%
0%
30

information on its group corporate structure?
23
77%
23%
0%
30

information on its company's constitution (company's bylaws, memorandum and articles of association)?
12
40%
18
60%
0%
30
D.3 Disclosure of related party transactions

(RPT) (Average)
23
76%
0%
30
Does the company disclose the name of the related party and
relationship for each material/significant RPT?
27
90%
10%
0%
30
Does the company disclose the nature and value for each
material/significant RPT?
27
90%
10%
0%
30
Does the company disclose its policy covering the review and
approval of material/significant RPTs?
14
47%
16
53%
0%
30
D.2 Quality of Annual Report (Average)
22
73%
0%
30
Does the company's annual report disclose its dividend

policy?
28
93%
7%
0%
30
Does the Annual Report contain a statement confirming the

company's full compliance with the code of corporate
governance and where there is non-compliance, identify and
explain reasons for each such issue?
27
90%
10%
0%
30
Does the company's annual report disclose the number of

board of directors/commissioners meetings held during the
year?
26
87%
13%
0%
30
Does the company's annual report disclose the key risks?
25
83%
17%
0%
30
Does the company's annual report disclose the biographical

details (at least age, qualifications, date of first appointment,
relevant experience, and any other directorships of listed
25
83%
17%
0%
30
16% 0
24% 0
27% 0
70
companies) of directors/commissioners?
Does the company's annual report disclose the attendance
details of each director/commissioner in respect of meetings
held/
25
83%
17%
0%
30
23
77%
23%
0%
30
22
73%
27%
0%
30
Does the company's annual report disclose the corporate

objectives?
20
67%
10
33%
0%
30
Does the company's annual report disclose the details of

remuneration of each member of the board of
19
63%
11
37%
0%
30
Does the company's annual report disclose the details of

whistle-blowing policy?
18
60%
12
40%
0%
30
Does the company's annual report disclose the non-financial

performance indicators?
20%
24
80%
0%
30
D.4 Directors and commissioners dealings

in shares of the company (Average)
20%
24
0%
30
Does the company disclose trading in the company's shares

by insiders?
20%
24
0%
30
D.5 External auditor and Auditor Report

(Average)
8%
28
0%
30
23%
23
77%
0%
30
0%
30
100%
0%
30
0%
30
100%
0%
30
30
8
25% 0
0%
1230
Does the company's annual report disclose the training and/or

continuing education programme attended by each
director/commissioner?
Does the company's annual report disclose the financial
performance indicators?
Are audit fees disclosed?

Where the same audit firm is engaged for both audit and nonaudit services, are the non-audit fees disclosed?
Where the same audit firm is engaged for both audit and nonaudit services, does the non-audit fee exceed the audit fees?
TOTAL (Overall)
922 75%
80% 0
80%
92% 0
The table above shows that out of 30 companies, 98% complied with the timely filing/
release of annual/ financial reports. All companies released their Audited Financial Statements in
a timely manner, which is on or before 120 days after financial year-end. Following the
conventional method of releasing concurrently financial & operating results and other issues
concerning company matters, these Audited Financial Statements are already contained in the
companies Annual Reports. As such, all companies were able to comply with the 120-day period
71
of publishing both Audited Financial Statements and Annual Report. Their compliance may have
been brought about by a directive that for a listed company, the External Auditor shall prepare
an audit report and submit it to the Board of Directors no later than three months from the end of
the financial year (IFC, 2014). In turn, under Article 66 of the Indonesian Company Law, the
Board of Directors shall submit an annual report (already inclusive of the Audited Financial
Statements) to the GMS after it has been reviewed by the Board of Commissioners, no later than
6 (six) months after the Companys accounting year ends. Finally, the announcement of Balance
Sheet and Profit and Loss statements shall be performed no later than 7 (seven) days as of the
date of ratification by the GMS as expressly ordered under Article 68 paragraph 5 of the
Indonesian Company Law. It is to be noted, however, that the period set by the Indonesian
Company Law as reiterated in the Code of Corporate Governance Manual (i.e. 6 months or 180
days) is well beyond the period indicated in the OECD Scorecard (i.e. 120 days). Nevertheless,
most companies release their Annual Reports earlier than the 120-day mark.
93% of the companies conformed to requirement of affirmation by the Board of Directors
or Commissioners and the relevant officers of the company of the true and fair representation of
the annual financial statements or reports. Furthermore, their Annual Reports contain a statement
confirming the company's full compliance with the code of corporate governance and identifies
and explains the reasons in case of noncompliance following the order that listed companies are
compelled to disclose and explain all deviations from Corporate Governance rules and
regulations in the declaration of compliance with the corporate governance principles (IFC,
2014). On the other hand, ADB and ASEAN Capital Market Forum, in their assessment of the
Corporate Governance practices in Indonesia during 2012 & 2013, evaluated that there is a lack
of board statements concerning compliance with companies corporate governance codes.
72
Results showed that 93% of the companies disclose the contact details of responsible
officers for purposes of performing investor relations functions. Most of the time, the task of
ensuring good investor relations is vested upon the companys Corporate Secretary (IFC, 2014).
100% of the companies communicate with stakeholders through both their website and media/
press conferences. These modes of communication have been increasingly used by Indonesian
companies for voluntary disclosure due to the emergence of the internet [as] an effective tool
for rapid and cost-effective communications (IFC, 2014). As an evidence, 100% of the
companies provide up-to-date information on financial statements/reports for the current and
prior years which can be downloaded via their respective websites. 93% of the companies
provide up-to-date materials used in analysts and media briefings also in their websites.
Likewise, information on business operations were disclosed via websites by 87% of the
companies. Online GMS notices are given in the websites as well. Notably, only 40% of the
companies disclose in their websites information concerning companys constitution.
Quarterly reporting has also been utilized by 93% of the companies being studied. Some
companies are already following best practices and disclose additional information on their
websites, including annual and quarterly reports for the last three years (IFC, 2014).
Only 73% of the companies disclosed information on the identity of its beneficial owners
(i.e. those owning at least 5% of the companys shares). 87% of the companies disclosed the
direct and indirect (deemed) shareholdings of their directors (commissioners). This naturally
flows from the compliance of BOC members of their obligation, imposed under Article 116 of
the Indonesian Company Law, to report to the company regarding its relative share ownership in
the company as well as in other companies. 97% of the companies provide details concerning
parent/holding companies, subsidiaries, associates, joint ventures and special purpose
73
enterprises/ vehicles (SPEs)/ (SPVs). It is important that shareholders are informed about
company ownership structures to understand their rights, role and authority in governing the
company and influence its policy. Depending on the size of ownership, shareholders have
various degrees of influence over decision-making in a company (IFC, 2014). However, ADB
and ASEAN Capital Market Forum evaluated that ownership structures are poorly disclosed.
90% of the companies disclose the name of, and their relationship with, related parties
involved in each material/significant related party transaction as well the nature and value of
such transactions. However, policies covering the review and approval of material/significant
RPTs are seldom disclosed with only 47% of the companies complying with such disclosure
requirement. Related party transactions are common in the context of groups of companies, e.g.
in parent-subsidiary relations. If one company dominates another, there is a risk that the parent
will utilize the subsidiary for its own business objectives, without care for the subsidiarys longterm financial viability. In these cases, the creditors and shareholders of both the subsidiary and
parent may be put at risk often unknowingly (IFC, 2014) hence the importance of disclosing
significant related parties and related party transactions.
The common disclosures found in the annual report of the company are the dividend
policy, key risks face by the companies, the number of board of directors or commissioners
meetings held during the year and the attendance details of each director or commissioner in
respect of meetings held, the biographical details of directors or commissioners together with
their training and/or continuing education programme attended. These results were consistent
with that of the assessment of the ASEAN Corporate Governance Scorecard of Indonesia for the
year 2012-2013 by the Asian Development Bank (ADB) and ASEAN Capital Market Forum.
The related study found that there is clear disclosure of key risks, financial performance
74
indicators, number of board meetings, and board meeting attendance in the Annual Report.
Additionally, ADB (2013) found that there is poor disclosure of whistle-blowing policy,
directors or commissioners training programs, and detailed remuneration of members of the
boards. These findings differ from Table 5 on which more than 50% of the companies have
disclosed these matters.
Only 20% of the companies provide adequate disclosure of review of transactions
including trading in shares by insiders. Finally, the least complied disclosure requirement was
that involving External Auditor and Auditor Report wherein only 8% of the companies disclosed
audit fees awarded to external auditors and none disclosed non-audit fees given to external
auditors concurrently performing non-audit services.
Overall, 75% of the companies have complied with the disclosure requirements indicated
in the ASEAN Corporate Governance Scorecard.
75
Table 6
Part E Responsibilities of the Board
(N=30)
YES
#
%
NO
#
%
N/A
#
%
E.1 Board Duties and Responsibilities

(Average)
26
87%
10%
3%
30
Does the company have a vision and mission statement?
30
100%
0%
0%
30
Does the board of directors monitor/oversee the

implementation of the corporate strategy?
30
100%
0%
0%
30
Are the roles and responsibilities of the board of

directors/commissioners clearly stated?
28
93%
7%
0%
30
Does the company disclose its corporate governance policy /

board charter?
27
90%
10%
0%
30
Has the board reviewed the vision and mission/strategy in

the last financial year?
25
83%
7%
10%
30
Are the types of decisions requiring board of

directors/commissioners' approval disclosed?
18
60%
12
40%
0%
30
E.5 Board Performance (Average)
25
83%
17%
0%
30
Does the company have orientation programmes for new

30
100%
0%
0%
30
Does the company have a policy that encourages

directors/commissioners to attend on-going or continuous
professional education programmes?
30
100%
0%
0%
30
Does the board of directors/commissioners conduct an

annual performance assessment of the CEO/Managing
Director/President?
30
100%
0%
0%
30
Is an annual performance assessment conducted of the board

of directors/commissioners?
30
100%
0%
0%
30
Is an annual performance assessment conducted of

individual director/commissioner?
30
100%
0%
0%
30
Is an annual performance assessment conducted of the board

of directors/commissioners committees?
30
100%
0%
0%
30
Does the company disclose the process followed in

conducting the board assessment?
22
73%
27%
0%
30
Does the company disclose the criteria used in the board

assessment?
21
70%
30%
0%
30

conducting the director/commissioner assessment?
21
70%
30%
0%
30
Does the company disclose the criteria used in the

director/commissioner assessment?
20
67%
10
33%
0%
30
Does the company disclose how the board of

directors/commissioners plans for the succession of the
CEO/Managing Director/President and key management?
16
53%
14
47%
0%
30
E.2 Board Structure (Average)
20
67%
23%
10%
30
Does the company have an Audit Committee?
30
100%
0%
0%
30
Is the chairman of the Audit Committee an independent

director/commissioner?
29
97%
0%
3%
30
CLUSTER
Total
76
Does the Audit Committee comprise entirely of nonexecutive directors/commissioners with a majority of
independent directors/commissioners?
28
93%
0%
7%
30
Does the company disclose the profile or qualifications of

the Audit Committee members?-
28
93%
7%
0%
30
Did the Audit Committee meet at least four times during the
year?
28
93%
0%
7%
30
Does the company disclose that all directors/commissioners,

senior management and employees are required to comply
with the code?
27
90%
10%
0%
30
Does the company disclose how it implements and monitors

compliance with the code of ethics or conduct?
27
90%
10%
0%
30
Are the independent directors/commissioners independent

of management and major/ substantial shareholders?
27
90%
10%
0%
30
Does the company disclose the terms of

reference/governance structure/charter of the Audit
Committee?
27
90%
10%
0%
30
Does at least one of the independent

directors/commissioners of the committee have accounting
expertise (accounting qualification or experience)?
27
90%
0%
10%
30
Are the details of the code of ethics or conduct disclosed?
26
87%
13%
0%
30
Is the attendance of members at Audit Committee meetings

disclosed?-
25
83%
13%
3%
30
Does the Audit Committee have primary responsibility for

recommendation on the appointment, and removal of the
external auditor?
24
80%
3%
17%
30
Does the company have a Remuneration Committee?-
23
77%
13%
10%
30
Does the company have any executive directors who serve

on more than two boards of listed companies outside of the
group?
20
67%
10
33%
0%
30
Does the company have a Nominating Committee (NC)?
20
67%
10
33%
0%
30
Does the company disclose the terms of reference/

governance structure/ charter of the Remuneration
Committee?-
19
63%
7%
30%
30
Is the attendance of members at Remuneration Committee

meetings disclosed?
19
63%
13%
23%
30
Did the Nominating Committee meet at least twice during

the year?
17
57%
13
43%
0%
30
Is the attendance of members at Nominating Committee

meetings disclosed?
17
57%
13
43%
0%
30
Did the Remuneration Committee meet at least twice during

the year?
16
53%
7%
12
40%
30
Do independent directors/commissioners make up at least

50% of the board of directors/commissioners?
13
43%
17
57%
0%
30
Does the company disclose the terms of reference/

governance structure/charter of the Nominating Committee?
13
43%
17
57%
0%
30
Is the chairman of the Nominating Committee an

independent director/commissioner?
11
37%
19
63%
0%
30
77
Has the company set a limit of five board seats that an
individual independent/non-executive
director/commissioner may hold simultaneously?
30%
21
70%
0%
30
Is the chairman of the Remuneration Committee an

independent director/commissioner?-
30%
23%
14
47%
30
Does the company have a term limit of nine years or less for
its independent directors/commissioners?
27%
22
73%
0%
30
Does the Remuneration Committee comprise of a majority

of independent directors/commissioners?-
27%
27%
14
47%
30
Does the Nominating Committee comprise of a majority of

independent directors/commissioners?
10%
27
90%
0%
30
E.4 People on the Board (Average)
18
60%
12
40%
0%
30
Do different persons assume the roles of chairman and

CEO?
30
100%
0%
0%
30
Does at least one non-executive director/commissioner have

prior working experience in the major sector that the
company is operating in?
30
100%
0%
0%
30
Are the role and responsibilities of the chairman disclosed?
28
93%
7%
0%
30
Does the company disclose a board of

directors/commissioners diversity policy?
14
47%
16
53%
0%
30
Is the chairman an independent director/commissioner?
17%
25
83%
0%
30
Are any of the directors a former CEO of the company in

the past 2 years?
3%
29
97%
0%
30
E.3 Board Processes (Average)
16
53%
30%
17%
30
Does the company secretary play a significant role in

supporting the board in discharging its responsibilities?
30
100%
0%
0%
30
Does the company have a separate internal audit function?
30
100%
0%
0%
30
Does the company disclose the internal control

procedures/risk management systems it has in place?
30
100%
0%
0%
30
Does the company disclose how key risks are managed?
30
100%
0%
0%
30
Is the company secretary trained in legal, accountancy or

company secretarial practices?
29
97%
0%
3%
30
Do the shareholders or the Board of Directors approve the

remuneration of the executive directors and/or the senior
executives?
28
93%
3%
3%
30
Is the head of internal audit identified or, if outsourced, is

the name of the external firm disclosed?
27
90%
10%
0%
30
Does the company disclose its remuneration policies for its

executive directors and CEO?
25
83%
17%
0%
30
Did the non-executive directors/commissioners of the

company meet separately at least once during the year
without any executives present?
20
67%
10%
23%
30
Does the board of directors/commissioners meet at least six

times during the year?
17
57%
12
40%
3%
30
Has each of the directors/commissioners attended at least

75% of all the board meetings held during the year?
17
57%
11
37%
7%
30
Is there disclosure of the fee structure for non-executive

13
43%
17
57%
0%
30
Are all the directors/commissioners subject to re-election at

least once every three years?
27%
27%
14
47%
30
78
Does the Annual Report disclose that the board of
directors/commissioners
has conducted a review of the company's material controls
and risk management systems?
Are the board of directors meeting scheduled before the start
of financial
27%
20
67%
7%
30
23%
13%
19
63%
30
23%
7%
21
70%
30
23%
23
77%
0%
30
23%
23
77%
0%
30
20%
20%
18
60%
30
20%
12
40%
12
40%
30
17%
12
40%
13
43%
30
13%
26
87%
0%
30
54
8
25%
18
7
8%
2220
year?
Are board papers for board of directors/commissioners
meetings provided to
the board at least five business days in advance of the board
meeting?
Does the company disclose the criteria used in selecting new
appointing new
Does the company require a minimum quorum of at least
2/3 for board
decisions?
Do independent non-executive directors/commissioners
receive options,
performance shares or bonuses?
Does the appointment and removal of the internal auditor
require the
approval of the Audit Committee?
Does the Annual Report contain a statement from the board
of
directors/commissioners or Audit Committee commenting
on the adequacy of the company's internal controls/risk
management systems?
Total (Overall)
1485 67%
According to this principle, the board of commissioners (BOC) should effectively

monitor management, provide strategic guidance to the company, and be accountable to the
company and its shareholders. The board should treat all shareholders fairly, apply high ethical
standards, and take the interests of stakeholders into account in all board decisions. It should
exercise objective and independent judgment in corporate affairs, and its members should be
committed to fulfilling their responsibilities and have access to accurate, timely, and relevant
information.
79
E.1. BOARD DUTIES AND RESPONSIBILITIES

Table 6 shows that on average, 87% of the 30 Indonesian companies' Board of
Commissioners complied with their board duties and responsibilities.
Corporate Vision/Mission
All( 100%) of the companies had a vision and mission statement. However, only 83% of
the companies' Board reviewed the vision and mission/strategy in the last financial year. Also, all
(100%) of the companies affirmed that their directors oversaw the implementation of corporate
strategy.
According to Indonesias Code of Corporate Governance (2006),, company values
constitute the moral basis in achieving the companys vision and mission. Therefore, before
formulating the company values, it is necessary for the company to formulate its vision and
mission.
Clearly defined Board responsibilities and Corporate Governance policy
Ninety-three percent (93%) of the companies clearly stated the roles and responsibilities
of the board of directors/commissioners. This signals a drastic improvement for the last decade in
the manner by which Indonesian companies disclose the duties and responsibilities of their
respective Board members. In a study by Kurniawan and Indriantoro in 2000, it is found that in
actual practice the duties of the Board of Directors and Commissioners are unclear. This is
because in contrast with companies under the common law system, there is only one Board (i.e.
Board of Directors) whereas companies incorporated under the Indonesian Company Law has
two Boards (i.e. Board of Directors and Commissioners). Thus, equivocal delineation of duties
may take place. Moreover, many Indonesian companies were typically controlled by families and
a few individuals during that time. (The Role of Disclosure in Strengthening Corporate
80
Governance and Accountability by Kurniawan and Indriantoro, 2000)

Ninety percent (90%) of the companies disclosed their corporate governance/board
charter while only 60% of the companies disclosed the types of decisions requiring board of
commissioners' approval.
E.5. BOARD PERFORMANCE
Table 6 shows that on average, 83% of the 30 Indonesian complied with the board
performance criteria.
Directors Development
One hundred percent (100%) of the research subjects have orientation programmes for
new commissioners and a policy that encouraged directors/commissioners to attend on-going or
continuous professional education programmes.
CEO/Executive Management Appointments and Performance
All (100%) of the companies affirmed that the board of commissioners conducted an
annual performance assessment of the CEO/Managing Director/President. However, only 53% of
the companies disclosed how the board of commissioners planned for the succession of the
CEO/Managing Director/President and key management.
Board Appraisal
All (100%) of the companies conducted an annual performance assessment of the board
of Commissioners. However, only 73% of the companies disclosed the process followed in
conducting the board assessment while only 70% disclosed the criteria used in board assessment.
81
Commissioner Appraisal
All (100%) of the companies conducted an annual performance assessment of individual
commissioners. However, only 70% of the companies disclosed the process followed in
conducting the commissioner assessment. Furthermore, only 67% of the companies disclosed the
criteria used in the commissioner assessment.
Committee Appraisal
All (100%) of the companies conducted an annual performance assessment of the board
of commissioners committees.
E.2. BOARD STRUCTURE
With regards to the board structure, on average, 67% of the companies complied.
Audit Committee
Specifically, all (100%) of the companies have an audit committee. 97% of the chairman
of the Audit Committee is an independent commissioner. 93% of the companies disclosed the
profile or qualifications of the Audit Committee members. Furthermore, 93% of the companies
Audit Committee comprised entirely of non-executive directors/commissioners with a majority
of independent directors/commissioners.
Based on the study of Rachman (2014), the audit committee is established as a special
committee to optimize the control function which previously was the sole responsibility of the
Board of Commissioners. This has been acknowledged by Bapepam-LK (Indonesian Capital
Market and Financial Institutions Supervisory Agency). Such compliance is mainly influenced
by Bapepam-LKs aggressive advocacy on the establishment of an audit committee and other
82
pertinent requirements as promulgated in its circular letter SE -03/PM/2002. Specifically, it states

that an Audit Committee is established as a special committee to optimize the control function
which previously was the sole responsibility of the Board of Commissioners. Further, an Audit
Committee must be composed of at least 3 persons chaired by a companys independent
commissioner with the proportion of 30% for the implementation of good corporate
management. The Audit Committee is responsible to the Board of Commissioners for the
implementation of their functions.
Ninety-three percent (93%) of the companies Audit Committee met at least four times
during the year. 90% of the companies disclosed the terms of reference/governance
structure/charter of the Audit Committee. 90% of the companies had at least one of the
independent commissioners of the Audit committee have accounting expertise. Meanwhile, only
83% of the companies disclosed the attendance of members at Audit Committee meetings.
Only 80% of the Audit Committee have primary responsibility for the recommendation
on the appointment, and removal of the external auditor.
Code of Ethics
Ninety percent (90%) of the companies disclosed that all directors/commissioners, senior
management and employees are required to comply with the code of ethics and how it
implemented and monitored compliance with the code of ethics or conduct. The high percentage
of compliance to this specific requirement may be attributed to the fact that Indonesia, through
the National Committee on Governance (NCG), has adopted a general Code of Ethics applicable
to Indonesian companies. Certain specific types of companies (such as banks, insurance
companies and securities companies) are even required to adopt professional ethics rules that
83
establish the most important principles and rules of business ethics. As stated in the Business
Ethics and Code of Conduct developed by the NCG, to attain success in the long term, Corporate
Governance implementation needs to be based on high integrity. Hence, a code of conduct that
can be used as a reference for a companys organs and its employees in applying the values and
business ethics is required so that it may become a part of the companys culture.
Eighty-seven percent (87%) of the companies disclosed the details of their Code of
Ethics. Apart from the express and strict requirement imposed by the Indonesia Corporate
Governance Manual, compliance with such a requirement brings about a multitude of tangible
and intangible benefits such as, but not limited to, (1) enhanced company reputation/image, (2)
improved risk and crisis management (3) development of a corporate culture (4) advanced
stakeholder communications and (5) avoidance of possible litigation. This may properly explain,
therefore, the ever-increasing emphasis and dedication of Indonesian companies to the adoption
of an appropriate Code of Ethics. (The Indonesia Corporate Governance Manual, First Edition
2014)
Board Structure and Composition
Ninety percent (90%) of the companies independent commissioners were independent of
management and major/ substantial shareholders.Moreover, 67% of the companies had executive
directors serving on more than two boards of listed companies outside of their respective group
of companies. However, only 43% of the companies had independent commissioners making up
at least 50% of the board of commissioners. On the other hand, 30% of the companies had set a
limit of five board seats that an individual independent/non-executive commissioner can
simultaneously hold. Furthermore, only 27% of the companies had a term limit of nine years or
84
less for its independent commissioners.

Remuneration Committee
Seventy-seven (77%) of the companies had a Remuneration Committee. Under Article
4.2 of the Corporate Governance Code of Indonesia, companies listed in the Indonesian Stock
Exchange shall establish a Remuneration Committee at their discretion. This likely explains the
paltry number of companies with an established Remuneration Committee.
Article 96 paragraph 3 of the Corporate Governance Code of Indonesia provides that the
authority of General Meeting of Shareholders may be conferred to the Board of Commissioners.
This is still on the premise that the formation of a Remuneration Committee is not mandatory
even for listed companies. In such a case, the amount of salary and remuneration, shall be
determined based on the Resolution of the meeting of the Board of Commissioners. Since, the
resolution regarding Board remuneration may be left to the will of the Board of Commissioners,
it cannot be expected that the details of remuneration be publicly disclosed.It possibly justifies,
therefore, that only 63% of the companies disclosed the terms of reference/ governance structure/
charter of the Remuneration Committee. This is so notwithstanding the fact that under the
National Corporate Governance Code of Indonesia, shareholders are given the right to appoint
members of the Board and vote for the Board members corresponding remuneration.
Only 63% of the companies disclosed the attendance of the members at Remuneration
Committee meetings. This is the case since only 77% of the companies employ a distinct
Remuneration Committee.
85
According to a study conducted by Talha et al. (2009), the remuneration committee is

responsible for preparing and providing recommendation in respect of the assessment of
remuneration system, the granting of options, such as stock option, pension rights and
redundancy and other compensation schemes for both BOD and BOC members. Their
seemingly short-running and limited responsibility (i.e. the annual determination of Board
members remuneration) likely explains why only 53% of the companies with a Remuneration
Committee met at least twice during the year.
However, only 30% of the companies with a Remuneration Committee chairman is an
independent commissioner and 27% of the companies with a Remuneration Committee was
comprised of a majority of independent commissioners. As far as compliance to the Indonesian
Corporate Governance Code and Company Law is concerned, this is permissible since the
formation of a Remuneration Committee is only encouraged but not required of the listed
Indonesian companies.
Nomination Committee
Sixty-seven percent (67%) of the companies had a Nominating Committee. 57% of the
companies Nominating Committee met at least twice during the year. Also, 57% of the
companies disclosed the attendance of committee members at Nominating Committee meetings.
43% of the companies disclosed the terms of reference/ governance structure/charter of the
Nominating Committee. On the other hand, only 37% of the companies Nominating Committee
chairman was an independent director/commissioner. However, only 10% of the companies
Nominating Committee comprised of a majority of independent commissioners.
86
E.4. PEOPLE ON THE BOARD

Table 6 shows that on average, 60% of the 30 Indonesian complied with the criteria set
for people on the board.
Board Chairman
All (100%) of the companies affirmed that different persons assumed the roles of
chairman and CEO.
93% of the companies disclosed the role and responsibilities of the
chairman. Nonetheless, only 17% of the companies had an independent commissioner as

chairman of the board of commissioner. Furthermore, only 3% of the companies had a director
who was a former CEO of the company in the past 2 years.
Skills and Competencies
All (100%) of the companies had at least one non-executive commissioner with prior
working experience in the major sector that the company is operating in. Meanwhile, only 47%
of the companies disclosed their board of commissioners diversity policy.
E.3. BOARD PROCESSES
Table 6 shows that on average, 53% of the 30 Indonesian complied with criteria set for
ideal board processes.
Access to Information
All (100%) of the companies secretary played a significant role in supporting the board
in discharging its responsibilities. 97% of the companies secretary was trained in legal,
accountancy or company secretarial practices. However, only 23% of the companies affirmed
87
that board papers for board of commissioners meetings were provided to the board at least five
business in advance of the board meeting.
Companies full compliance in terms of its corporate secretary is due to the Indonesian
Financial Services Authority (Otoritas Jasa Keuangan ("OJK")) issuing Rule Number
35/POJK.04/2014. According to Hadiputranto, Hadinoto & Partners (2015), the implication of
the New Rule for Issuers and Public Companies is that there is now a legal requirement to
improve their corporate governance in relation to their corporate secretaries. If they do not meet
this increased corporate governance standard, issuers and public companies will face sanctions
from OJK. Furthermore, the new rule also mandated that the corporate secretary should have
knowledge about legal issues, finance and corporate governance.
However, this is no explicit rule on the issuance of board materials for at least five
business days in advance of the board meeting, thus the relatively low score of Indonesian
companies in this aspect.
Internal audit
All (100%) of the companies had a separate internal audit function. However, only 90%
of the companies identified the head of internal audit or disclosed the name of the external firm if
outsourced. In addition to that, only 17% of the companies required the approval of the Audit
Committee in the appointment and removal of the internal auditor.
As stated by IFC (2014), in addition to having a General Meeting of Shareholders
(GMS), Board of Commissioners and Board of Directors, listed companies must also have an
Internal Audit as mandated by Head of OJK Decree No. Kep-496/BL/2008, thus rationalizing
88
the widespread establishment of an internal audit functions among Indonesian companies.

Meanwhile, only a few companies have their Audit Committee approve the appointment
and removal of the internal auditor. According to IFC (2014), the Head of Internal Audit is
appointed and dismissed by the Board of Directors, provided that any appointment, replacement,
or dismissal of the Head of Internal Audit shall be notified to OJK. In reality, it is difficult for the
internal audit function to be entirely independent of management. Cognizant of the need to
maintain independence while working closely with management, the Institute of Internal
Auditors suggests that the Internal Auditor report administratively to the President Director and
functionally to the Board of Commissioners Audit Committee.
Risk Oversight
All (100%) of the companies disclosed the internal control procedures/risk management
systems it had in place and how key risks are managed. However, only 27% of the companies
Annual Report disclosed that the board of commissioners had conducted a review of the
company's material controls and risk management systems. Additionally, only 13% of the
companies Annual Report contained a statement from the board of commissioners or Audit
Committee commenting on the adequacy of the company's internal controls/risk management
systems. As prescribed by NGC (2006), the Board of Directors shall establish and implement a
sound risk management within the company covering all aspects of the companys activities.
However, disclosure requirements are not strictly complied with.
Remuneration Matters
93% of the companies approved the remuneration of the executive directors and/or the
89
senior executives through
the shareholders or the Board of
Commissioners. 83% of the
companies disclosed its remuneration policies for its executive directors and CEO. However,
only 43% of the companies disclosed the fee structure for non-executive commissioners.
Moreover, 20% of the companies independent non-executive commissioners received options,
performance shares or bonuses.
Based on the Indonesian Company Law No. 40 of 2007 (2007), the provision regarding
the amount of salary and remuneration of the members of the Board of Directors shall be
determined based on the resolution of the General Meeting of Shareholders, thus contributing to
the relatively high percentage of companies whose shareholders approval were essential in the
determination of their executive directors and/or the senior executives remuneration.
Moreover, based on the study of Mjahid, et al. (2014), disclosure to shareholders
pertaining to director remuneration is common to Indonesian companies. One reason for this is
the implementation of Bapepam-LK VIII.G.7 which required reporting entities to provide a
detailed analysis of the types of compensation made during the year and to not simply disclose a
total aggregate amount. Moreover, it also required the disclosure to be broken down for
compensation made to (1) each individual that is part of the key management personnel (KMP)
and (2) total compensation made to Board of Commissioners, total made to Board of Directors,
total made to shareholders that are part of management and total made to other members of the
key management personnel.
Board Meetings and Attendance
Sixty- seven percent (67%) of the companies non-executive commissioners met
separately at least once during the year without any executives present. 57% of the companies
90
board of commissioners met at least six times during the year. Though only 23% of the
companies explicitly affirmed that the board of commissioners meeting was scheduled before the
start of financial year, still, 57% of the companies had affirmed that each of the commissioners
attended at least 75% of all the board meetings held during the year. However, only 20% of the
companies had affirmed that it required a minimum quorum of at least 2/3 for board decisions.
Board Appointments and Re-election
Twenty-seven percent (27%) of the companies confirmed that all of its commissioners
were subject to re-election at least once every three years. 23% of the companies disclosed the
criteria used in selecting new commissioners. Also, 23% of the companies disclosed the process
followed in appointing new commissioners.
Generally, most of the practices pertaining to the responsibilities of the board were set out
in the Code of Good Corporate Governance. According to the ACC (2015), the Code of
Corporate Governance is a set of non-binding principles and benchmarks for all companies
(private and public) in Indonesia. It further stated that as the Code of Corporate Governance is
not mandatory but instead adopts a comply or explain approach, there are no direct consequences
for failure to comply with the code. Furthermore, according to Kamal (2010), the code can be
seen as a soft law rather than a law as no legal sanction can be imposed when a company does
not comply with the code. Thus this explains why most of the major aspects the board
responsibilities are basically superficial.
On the other hand, according to ADB (2013), some corporate governance practices are
mandated but not all publicly-listed companies follow the requirements. Thus, publicly listed
companies need to improve their compliance with the rules.
91
Table 7
Bonus
YES
CLUSTER
NO
N/A
TOTAL
C.1) The rights of stakeholders that are

established by law or through mutual
agreements are to be respected (AVERAGE
for C)
30
100
%
0%
0%
30
C.1.1) Does the company practice integrated report on

its annual reports?
30
100%
0%
0%
30
B.1) Notice of AGM (AVERAGE for B)
29
97%
0%
3%
30
B.1.1) Does the company release its notice of AGM

(with detailed agendas and explanatory circulars), as
announced to the Exchange, at least 28 days before the
date of the meeting?
29
97%
0%
3%
30
E.5) Board Performance (AVERAGE)
26
87%
13%
0%
30
E.5.1) Does the company have a separate level Risk

Committee?
26
87%
13%
0%
30
D.1) Quality of Annual Report

(AVERAGE for D)
23
77%
23%
0%
30
D.1.1) Are the audited annual financial report /statement

released within 60 days from the financial year end?
24
80%
20%
0%
30
D.1.2) Does the company disclose details of

remuneration of the CEO?
22
73%
27%
0%
30
E.1) Board Competencies and Diversity

(AVERAGE)
10
33%
2
0
67%
0%
30
E.1.1) Does the company have at least one female

independent director/commissioner?
10
33%
20
67%
0%
30
E.3) Board Appointmend and ReElection (AVERAGE)
30%
1
7
57%
13%
30
E.3.1) Does the company use professional search firms

or other external sources of candidates (such as director
databases set up by director or shareholder bodies) when
searching for candidates to the board of
30%
17
57%
13%
30
92
A.1) Right to participate effectively in

and vote in general shareholders
meeting and should be informed of the
rules, including voting procedures that
govern general shareholders meeting.
(AVERAGE for A)
0%
0%
30
100
%
30
A.1.1) Does the company allow the use of secure

electronic voting in absentia at the general meetings of
shareholders?
0%
0%
30
100%
30
E.2) Nominating Committee

(AVERAGE)
0%
0%
30
100
%
30
E.2.1) Does the Nominating Committee comprise

entirely of independent directors/commissioners?
0%
0%
30
100%
30
E.2.2) Does the Nominating Committee undertake the

process of identifying the quality of directors aligned
with the company's strategic directions?
0%
0%
30
100%
30
E.4) Board Structure and Composition

(AVERAGE)
0%
3
0
100
%
0%
30
E.4.1) Do independent non-executive

directors/commissioners make up more than 50% of the
board of directors/commissioners?
0%
30
100%
0%
30
150
45%
85
26%
95
29%
330
TOTALS
Table 9 displays the bonus score tabulations for all the selected publicly-listed companies
in which the clusters were arranged based on yes scores from highest to lowest. As shown in
Table 9, all the companies have complied with the practice of (in general) respecting the rights of
shareholders which are established by law or through mutual agreements specifically through
practicing integrated reporting on their respective annual reports. With respect to the notice of
the Annual General Meeting (AGM), 29 out of 30 (which is 97%) releases such notice at least
28 days prior to the scheduled meeting with the details regarding agendas and explanatory
circulars. The next with one of the highest yes scores are the board performance (26 out of 30,
i.e. 87%) and quality of annual report (on average 23 out of 30, i.e. 77%). This shows that
majority of the companies (as for board performance) have a separate Level Risk Committee and
93
(with respect to quality of annual report) releases their audited annual financial report/ statement
within 69 days from financial year end and discloses the details of remuneration of the CEO. As
to board competencies and diversity, 10 out of 30 companies have at least one female
independent/commissioner. Minority of the companies (which is 30%) uses professional firms or
other external sources of candidates when searching for candidates to the board of
directors/commissioners. The independent non-executive directors/commissioners of all the
companies do not make up more than 50% of the board of directors/commissioners. Others are
not applicable to the companies. Overall, almost majority (45%) of the companies on average
have been awarded with bonus points.
According to the ASEAN corporate Governance Scorecard country reports and
assessments that bonus points are intended to motivate companies to impement corporate
governance beyond standards as is evident based on the results of the tabuations. Companies
would have the tendency to pursue bonus points for these will impact their score in a positive
way.
94
Table 8
Penalty
CLUSTER
YES
f
%
NO
F
N/A
f
%
TOTAL
E.4) Board structure and composition

(AVERAGE)
30
50%
30
50%
0%
60
E.4.1) Has the chairman been the company CEO in the

last three years?
30
100%
0%
0%
30
A.4) Capital structures and

arrangements that enable certain
shareholders to obtain a degree of
control disproportionate to their equity
ownership should be disclosed.
(AVERAGE)
10
33%
18.
3
61%
1.7
6%
30
A.4.3) Multiple voting rights?
15
50%
15
50%
0%
30
A.4.1) Shareholders agreement?
27%
17
57%
17%
30
A.4.2) Voting cap?
23%
23
77%
0%
30
E.2) Board Appraisal (AVERAGE)
10
33%
18
60%
7%
30
E.2.1) Does the Company have any independent

directors/commissioners who have served for more than
nine years or two terms (whichever is higher) in the
same capacity?
30
100%
0%
0%
30
E.2.2) Did the company fail to identify who are the

independent director(s) / commissioner(s)?
0%
30
100%
0%
30
E.2.3) Does the company have any independent

directors/non-executive/commissioners who serve on a
total of more than five boards of publicly-listed
companies?
0%
24
80%
20%
30
A.3) Right to participate effectively in

and vote in general shareholders
meeting and should be informed of the
rules, including voting procedures that
govern general shareholders meeting.
(AVERAGE)
17%
25
83%
0%
30
A.3.1) Did the company include any additional and

unannounced agenda item into the notice of
AGM/EGM?
17%
25
83%
0%
30
Did the company fail to disclose the existence of:
95
C.2) Where stakeholders participate in

the corporate governance process, they
should have access to relevant,
sufficient and reliable information on a
timely and regular basis. (AVERAGE)
17%
25
83%
0%
30
C.2.1) Has the company faced any sanctions by

regulators for failure to make announcements within the
requisite time period for material events?
17%
25
83%
0%
30
E.3) External Audit (AVERAGE)
10%
7%
25
83
%
30
E.3.1) Are any of the directors or senior management a

former employee or partner of the current external
auditor (in the past 2 years)?
10%
7%
25
83%
30
A.1) Basic shareholder right

(AVERAGE)
0%
30
100
%
0%
30
A.1.1) Did the company fail or neglect to offer equal

treatment for share repurchases to all shareholders?
0%
30
100%
0%
30
A.2) Shareholders, including

institutional shareholders, should be
allowed to consult with each other on
issues concerning their basic
shareholder rights as defined in the
Principles, subject to exceptions to
prevent abuse (AVERAGE)
0%
30
100
%
0%
30
A.2.1) Is there evidence of barriers that prevent

shareholders from communicating or consulting with
other shareholders?
0%
30
100%
0%
30
A.5) Capital structures and

arrangements that enable certain
shareholders to obtain a degree of
control disproportionate to their equity
ownership should be disclosed.
(AVERAGE)
0%
30
100
%
0%
30
A.5.1) Is a pyramid ownership structure and/ or cross

holding structure apparent?
0%
30
100%
0%
30
B.1) Insider trading and abusive selfdealing should be prohibited.

(AVERAGE)
0%
30
100
%
0%
30
B.1.1) Has there been any conviction of insider trading

involving directors/commissioners, management and
employees in the past three years?
0%
30
100%
0%
30
B.2) Protecting minority shareholders

from abusive action (AVERAGE)
0%
30
100
%
0%
30
96
B.2.1) Has there been any cases of noncompliance with
the laws, rules and regulations pertaining to significant
or material related party transactions in the past three
years?
0%
30
100%
0%
30
C.1) The rights of stakeholders that are

established by law or through mutual
agreements are to be respected.
(AVERAGE)
0%
30
100
%
0%
30
C.1.1) Have there been any violations of any laws

pertaining to labour/employment/ consumer/insolvency/
commercial/competition or environmental issues?
0%
30
100%
0%
30
D.2) Sanctions from regulator on

financial reports (AVERAGE)
0%
30
100
%
0%
30
D.2.1) Did the company receive a "qualified opinion" in

its external audit report?
0%
30
100%
0%
30
D.2.2) Did the company receive a "adverse opinion" in

0%
30
100%
0%
30
D.2.3) Did the company receive a "disclamer opinion" in

0%
30
100%
0%
30
D.2.4) Has the company in the past year revised its

financial statements for reasons other than changes in
accounting policies?
0%
30
100%
0%
30
E.1) Compliance with listing rules,

regulations and applicable laws
(AVERAGE)
0%
30
100
%
0%
30
E.1.1) Is there any evidence that the company has not

complied with any listing rules and regulations over the
past year apart from disclosure rules?
0%
30
100%
0%
30
E.1.2) Have there been any instances where nonexecutive directors/commissioner have resigned and
raised any issues of governance-related concerns?
0%
30
100%
0%
30
521
79%
36
5%
660
TOTALS
103 16%
Table 10 displays the penalty score tabulations for all the selected publicly-listed
companies in which the clusters were arranged based on average yes scores from highest to
lowest. Based on the statistics, all of the companies (100%) had chairman who had been the
company CEO in the last three years. Also, the instances where penalty points were given relate
97
to capital structures and arrangements and board appraisal. On average, 10 out of 30 companies
(or 33%) were given penalty points with respect to these. Specifically, these companies failed to
disclose the existence of multiple voting rights (50%), shareholders agreement (27%) and voting
cap (23%). On the other hand, all companies have independent directors/commissioners who
have served for more than nine years or two terms. Another instance was related to the company
including any additional and unannounced agenda item into the notice of AGM and sanctions
faced by the company for failure to make announcements within the requisite time period in case
of material events where 5 out of 30 companies (or 17%) incurred penalty points. Also, based on
the results, 3 out of 30 companies (or 10%) had directors or senior management who was a
former employee or partner of the current external auditor (the past 2 years). The rest of the
practices were not carried out by the companies and hence no penalty points were imposed.
Overall, most of the companies (79%) are not given penalty points.
Penalty scores have a great impact on the overall score achieved by the companies. Only
few companies incurred penalty points which could reflect what the Asian Development Bank
has mentioned that corporate governance in Indonesia is still considered to be below an
acceptable level.
98
20
II. Company Financial Performance Analysis
Frequency
10
15
19
-.5
ROE
.5
Figure 3. Graphical Representation of Companies ROE.
Table 9
Descriptive Statistics of ROE for Entire 30 Companies
Variable
ROE
PM
AT
EM
Mean
0.19546
0.174453
0.73114
2.755203
Standard Deviation
0.224987
0.141242
0.56087
2.04472
Minimum
-0.14
-0.0825
0.0644
1.1195
Maximum
1.2478
0.458
2.5579
7.5738
This section showed the descriptive statistics of sampled companies using mean
(average), minimum and maximum values as well standard deviation of ROE in determining
companys financial performance. The results from the financial performance of the companies
have given an average ROE of 19.546%. As shown in the graph above, 19 companies has an
ROE within the range of 10% to 30%. There are about 30% of the total sample whos ROE is
99
below average and only less than 10% of the sample was able to go beyond ROE average. The
highest ROE determined is 124.78%, and the lowest is -14%. The researchers have also
considered the components of the DuPont Equation and determined the statistics for such. The
average profit margin is 17.44% and highest profit margin recorded is 45.8% while the lowest is
-8.25%. The asset turnover is 73.114% and highest asset turnover recorded is 255.79% while the
lowest is 6.44%. The average equity multiplier is 2.775 and highest equity multiplier recorded is
7.57388 while the lowest is 1.1195. This section shows the descriptive statistics of the industries
of the sampled companies using mean (average) values, minimum and maximum as well the
global standard ratio of ROE in each industry.
Table 10
Descriptive Statistics of Sampled Subsectors with corresponding Global Standard Ratios
Industry
Automotive
Banking
Cement Production
Cigarette Production
Consumer Goods
Wholesale
Food and Beverage
Media
Mining and Related
Energy
Pharmaceuticals
Sale and Rental of
Heavy Equipment
Telecommunications
Transportation
Mean
ROE
(%)
Minimu
m%
Maximum Global
%
Standard
Performance
15.94
18.09
21.76
16.16
124.7
8
15.96
21.66
15.94
7.89
21.27%
16.16
15.94
24.8
22.26%
16.16
18.61
8.21
19.5
-54.14
Below average
Above average
Above average
Above average
124.78
124.78
16.1
Above average
9.42
4.44
21.15
41.79
18.17
17.84
Below average
Above average
13.09
-6.5
24.39
3.68
Above average
21.03
21.03
21.03
11.23
Above average
13.92
13.92
13.92
16.66
Below average
7.03
12.28
-14
12.28
31.51
12.28
23.72
24.27
Below average
Below average
100
Financial performance is defined in this study as an increase in shareholders wealth

measured by Return on Equity analyzed using the DuPont Equation. ROE, return on equity
capital is the ratio of net income to common equity. It is used to measure the accounting rate of
return on stockholders investment. The higher the ratio, the greater the rate of return
stockholders are earning on their investments (Brigham & Houston, 2012).
Leverage
Leverage is defined as 1.) The use of various financial instruments or borrowed capital,
such as margin, to increase the potential return of an investment or 2.) The amount of debt used
to finance a firm's assets. A firm with significantly more debt than equity is considered to be
highly leveraged (Investopedia.com)
Descriptive Statistical Analysis of Sampled Companies
This section showed the descriptive statistics of sampled companies using mean
(average) values, median and mode as well as range and standard deviation of ROE.
Suppletorily, the components of the DuPont equation being Profit Margin, Asset Turnover and
Equity Multiplier are analyzed.
Automotive Industry
The Automotive industry was represented by a single company out of the 30 being
sampled. Thus, for statistical analysis purposes, the companys ROE of 15.94% is considered to
be the average of all the others in the same industry. This ratio, however, is below the global
average for the same industry. This may be attributed to the decline in car sales in Indonesia for
the year 2014 as compared to the preceding year according to the latest data from the Indonesian
101
Automotive Manufacturers Association, hence providing further confirmation that consumer

demand has continued to fall amid the countrys slowing economic growth, depreciating rupiah
and accelerating inflation. Moreover, the company studied in this research had an equity
multiplier of 1.87 which indicated that it obtains more capital internally (through accumulation
of net earnings) and externally from stockholders than externally through debt instruments and
loan agreements. Its being less financially leveraged may have limited it to generate fewer
profits than what could have been had it used more debt financing.
Banking
Five companies represented the Banking Industry. The largest company in this industry
had an Average Total Assets of
Rp 794,069,717.50. For this industry, the average ROE was
18.09%, a minimum value of 7.89% and a maximum value of 24.80%. The mean ROE of
companies in this sector (18.09%) was higher than the global average of 8.21%.
The banking sector remains a key sector for growth of Indonesia's financial industry as
well as the country's general economic expansion as the sector posted the highest profits
worldwide. Prasetiantoko Augustine, economist at Bank Tabungan Negara (BTN), said that
profitability in Indonesia's banking sector is not only highest in the ASEAN and Southeast Asian
region but also worldwide. (Indonesia Investments.com)
According to Augustine, an important factor that account for the high ROE within the
Indonesian banking industry is that the average net interest margin (difference between interest
generated from investments and interest paid to lenders) is high. The average Profit Margin
companies comprising the Banking Industry was at a relatively high rate of 36.84%.
102
However, the average Asset Turnover Ratios of the companies in the banking industry
was only 7.15%. This is attributable to the banks considerably high levels of Total Assets
maintained through extensive investments in short-term and long-term debt and equity
instruments in relation to total revenue generated.
Due to the nature of a banks operations, assets are expected to be financed more
rigorously by debt financing through loans from depositors and lenders than by issuance of
stocks and accumulation of internal equity (through retained earnings). For this reason, the
banks average equity multiplier is at an extremely high level at 6.79. This high average equity
multiplier, supplemented by an above-average Profit Margin greatly contributed to the high ROE
of banks despite a very low average Asset Turnover ratio.
Cement
There were two companies which represented the Cement Production industry. Their
average ROE was 21.76% with both companies generating ROE figures very close to each other,
0.99% being the difference. The companies net income, sales, average total assets and equity are
relatively close and comparable in size. Moreover, the mean ROE was relatively higher than the
global ratio of 19.5%. The companies relatively high ROE can be attributed to its high Profit
Margin of 23.49% although Asset Turnover Ratio is only 0.7748 and Equity Multiplier is at
1.2108.
The figure may signal a good performance by Indonesian cement-producing companies
but it is to be noted that Indonesian cement sales fell 25 percent to 3.7 million tons in July 2014
from 5 million tons in the same month last year. This sharp decline is attributed to
103
the Lebaran holiday (also known as Idul Fitri in which Muslims celebrate the end of the fasting
month) when businesses are closed as well as Indonesias July 2014 presidential election.
Cigarette Production
Only one company represented the Cigarette production industry in this study. Its ROE
was 16.16% was well ahead and higher than the global standard ratio of -54.14%. This may be
explained as being due to an act of Indonesian government abandoning the idea to increase
excises on cigarettes, the production of cigarettes in Indonesia being expected to increase to
between 355 and 360 billion cigarettes in 2014. Moreover, Indonesia has one of the world's
largest markets for cigarettes with about two-third of all Indonesian men and 5% of women being
considered regular smokers. Also, raw materials and other production means are mostly sourced
domestically, tobacco has low production costs and has been resilient to the global economic
downturn. However, the companys Profit Margin is at 8.24% only.
Asset Turnover Ratio figure of 1.20 as compared to sample average of 0.73 indicate that
the company is generating adequate revenues from the employment of its operating assets.
Additionally, the companys Equity Multiplier of 1.64 is below the average of the 30
companies in the sample of 2.76. This is because its liabilities are obtained mostly from shortterm bank loans and payables and accrued expenses- its non-current liabilities only coming from
obligations to employees (Employee Benefit Obligations) and Deferred Tax Liabilities.
Consumer Goods (Wholesale)
One company represented the Consumer Goods Wholesale industry. Its ROE was
124.78% which is very well higher than the global average of 16.10%.This huge variance may
104
further be analyzed by dissecting into the companys ROE components. Its profit margin of
16.63% is relatively comparable to that of the other samples in the study being a little lower than
the average. However its Asset Turnover ratio is exceedingly above average and was ranked first
among all companies included in the sample. This is because Asset turnover ratios are normally
higher for companies in Consumer Staples Sectors since these companies tend to have small
asset bases but a high volume of sales due to competitive pricing. Its Equity Multiplier is at 2.93.
Food and Beverage
The Food and Beverage industry covered four companies the average ROE of which was
15.96%- lower than the average global ratio of 18.17%. It must be noted, however, that
Indonesia's economy is largely driven by rising household consumption, and one industry that
thrives on this like no other is that of food and beverages. Sales growth is fuelled by rising
personal incomes and increased spending on food and drink, especially from the growing number
of middle class consumers. (Global Business Guide Indonesia) Their average equity multiplier is
1.6515 which indicated that the companies are less financially leveraged with total equity
financing an average of 60% of the total company assets.
Indonesia, a country with more than 250 million people, is a lucrative market for food
and beverage producers, particularly as the country is experiencing steady economic growth
hence giving rise to a rapidly expanding middle class segment that consumes more and more
products.
Media Industry
The media industry is composed of three representative companies. The industry reports
105
a substantial return on equity at 41.79%. This is the second with the highest ROE among
the companies evaluated. This is backed up by a strong profit margin ratio at 35.84%. The lowest
ROE is 4.44% and this can be attributed also to its relatively low profit margin at 662%, the
lowest profit margin among the media companies evaluated. Ranked as 9 th among the companies
evaluated in terms of asset turnover, its strong asset turnover ratio of .9298 also contributes to the
industrys ROE.
Mining and Related Energy Industry
The mining industry consists of six major companies engaged in mining coal, nickel, and
other metals and the exploration and production of oil and gas. The largest ROE in this industry
is 24.39 while the lowest is -6.50%. Its major driver of profitability is the profit margin wherein
the company with the highest ROE also garnered the highest profit margin among the six
companies represented in the industry. Furthermore, the company which reported the lowest
ROE also has a negative profit margin of -8.23.
The asset turnover is also heavily correlated to the ROE. Companies with relatively high
ROEs in the industry also have above average asset turnover ratios.
Asset multiplier or the leveraging effect of debt has a somehow erratic relationship with
ROE. Companies that report negative ROE conversely have a relatively high asset multiplier
while well-performing companies have an average equity multiplier.
Despite the negative ROE of one sampled company within the industry and the wide gap
between the highest ROE and lowest ROE, it is also to be considered that the global standard
ROE ratio presents that the mining and related energy has -6.41% ROE.
106
Pharmaceuticals Industry
Pharmaceuticals industry encompasses only one company. Its ROE is 21.03. This is one
of the industries that report a relatively high ROE. The asset turnover is the primary driver of its
profitability at 1.4632 and is 4th from the largest in terms of asset turnover.
On the other hand, the industry makes use of minimal debt that results to it being ranked
as the 28th among the 30 companies evaluated in terms of equity multiplier.
Comparison to global standard ratios shows that the financial performance of companies
in the pharmaceutical industry in Indonesia is relatively high. Indonesias pharmaceutical
industrys ROE is 21.03% compared to the 11.23% globally accepted ratio for the
pharmaceutical industry.
Heavy Machinery Industry
The heavy machinery industry is composed of only one representative company from the
FTSE ASEAN index. The industrys ROE is 13.2%., slightly lower than global standard ratio of
16.66%. Its profitability is primarily driven by its asset turnover ratio of .9034. Profit margin
ratio of 10.10% and equity multiplier of 1.5249 presents only moderate contribution to the
industrys ROE. It has been noted that the industry is heavily machinery industry relies heavily
on works that are done in the mining sector. Ongoing falling trend of various commodities price
that has happened for the past few years had significantly slowed the mining industry. Mining
companies, as a part of their strategy, decreased their target volume of production and even
postponed their expansion plan, therefore reducing the amount of works that need the use and
purchase of heavy equipment.
107
Telecommunications Industry
The telecommunications industry covers four companies from the FTSE ASEAN
INDEX. The highest ROE is 31.51% while the lowest among the four is -14%. The industrys
high ROE is predominantly driven by a high profit margin ratio at 39.36%. The industry ranks 3 rd
among the companies with the largest profit margin. Its equity multiplier of 4.9326 also
contributes to its promising return on equity. This ratio made the telecommunication industry 6 th
among the companies with the highest equity multipliers.
As compared to the global standard ROE ratio of 23.72%, the industry is performing
quite well in terms of ROE at 31. 51%. Its profit margin of 8.24% does not show a strong support
to boost the industrys ROE.
Toll Road Industry
The toll road industry covers only one company which is engaged in the development of
toll road infrastructure. Under this is a company engaged in the sales and rental of heavy
equipment and after sales services. For the year 2014, the company has reported an ROE of
24.27%. Its major driver of profitability is its relatively large equity multiplier which is 2.6222.
This equity multiplier is only justifiable since the industry is characterized by large capital
outlays which are mostly from debt financing for the expansion, maintenance and construction of
additional toll roads. Most of the major bond issuances are used to maintain adequate working
capital enough to sustain the demands of the toll road industry. However, though ranked fourth in
terms of leverage, the industry ranked only 22nd among the 30 companies based on its ROE.
Moreover, based on the industry review done by the representative company, Jasa Marga,
it is worth noting that the toll road industry is to some extent interdependent to the automotive
108
industry. This observation can be corroborated by the data gathered by the researchers. Astra
International's, an automotive company, ROE scores 18.61% while the toll road industry presents
a 12.28 ROE, with the automotive industry ranked as the 20th and the toll read industry being at
the 22nd ran in terms of ROE. The growth rate of the vehicles has a positive correlation with the
traffic volume, therefore the growth in vehicle sales results in higher traffic volume, which
consequently leads to an increase in demand for additional toll road development.
In terms of profit margin, the industrys profit margin as represented by Jasa Marga is
quite competitive at 16.33%. Toll road companies earn a relatively modest amount of return for
every sale consummated.
As a final note, among the three drivers of profitability, the industry is quite sluggish in
terms of its asset turnover ratio. It only presents a 0.2868 asset turnover ratio and ranked 23 rd
among the 30 companies evaluated. This is quite understandable since inventories in the toll road
industry are oftentimes large-scale projects national road projects and are not expected to be
readily sold at great frequency. The industrys ROE of 12.28% is half of the global ROE ratio of
24.27% for toll road industries.
109
Part III: Correlation of Corporate Governance and ROE

The following presents the relationship between ROE and the explanatory variables
for Corporate Governance. The Pearsons correlation was used to determine the relationship
between the dependent and independent variables. In using the Pearsons correlation, the
researchers assumed that the variables are at the continuous level and that a linear
relationship between the variables exists. Further, to avoid significant outliers in the sample,
the researchers omitted (three) 3 companies from being included in the observation. One
sample had an ROE greater than 1 and two samples had and ROE of less than 0. All of the
variables were adjusted to control the size of the companies as measured by Total Assets.
Lastly, it was assumed that the variables are normally distributed.
A. Relationship of ROE and Part A adjusted for Total Assets
Correlation P-Value
-.22923
.1391
Number of Observations
27
R-Squared
.05258
110
Figure 4. Relationship of ROE and Part A Adjusted for Total Assets.

Part A takes into account the rights of shareholders. Shareholders are essentially the
owners of the corporation. The researchers assessed the relationship between ROE and
Shareholders Rights in 27 publicly listed Indonesian Companies. There was a small
negative
correlation between Shareholders rights and ROE, r(25) = -.22923, with
Shareholders Rights explaining only 5.25% of the variation in ROE. The results are not
statistically significant at the 95% confidence level. There is a 13.9% probability that the
correlation obtained occurred by chance. Variables measuring the protection of shareholder
rights do not appear to have additional explanatory power.
The negative correlation between Part A (Rights of Shareholders) and ROE is consistent
with the long-held belief that shareholders goals are oftentimes incongruent with the companys.
For better overall company performance, CEOs tasked with running a company should focus as
much on the preservation and growth of the business as on the maximization of shareholder
wealth. Placing pressure on executives to maximize returns for investors every quarter can lead
to hasty business decisions, poor strategic planning, and acquisitions or divestitures that backfire
later. More importantly, they are compensated based on short-term price performance rather than
long-term business feasibility, which can misalign the interests of both management and current
shareholders with the true welfare of the company. The obsession with shareholder value can
sometimes compromise a companys innovation and strategic direction in favor of immediate
profits (Sanghoee, 2014). With that being said, there has always been a conflict of interest
between shareholders and managers as explained by the agency theory. This was highly evident
in the findings of the study as Part A demonstrated the strongest correlation with ROE among all
the other four (4) components of the OECD Scorecard.
111
B. Relationship of ROE and Part B adjusted for Total Assets

Correlation
.0473
P-Value
.8146
27
R-Squared
.00223
Figure 5. Relationship of ROE and Part B Adjusted of Total Assets
Part B encompasses Equitable Treatment of Shareholders. The researchers assessed

the relationship between ROE and Equitable Treatment of Shareholders in 27 publicly listed
Indonesian Companies. There was a small positive correlation between Equitable Treatment
of
Shareholders and ROE, r(25) = -.0473, with Equitable Treatment of Shreholders
explaining only .223% of the variation in ROE. The results are not statistically significant at
the 95% confidence level. There is an 81.46% probability that the correlation obtained
occurred by chance. According to the results, there is a feeble correlation between a
112
companys treatment of shareholders and its return on equity. The research is consistent
with the study of Cutting and Kouzim (2000) which did not find any significant
relationship between the performance of the firms and how the rights are established in
their company. However, the study of Gompers, Ishii and Metrick (2003) revealed that 2/3 of
investors were prepared to pay more for shares of companies that have good corporate
governance practices which naturally include good treatment of shareholders by the company.
C. Relationship of ROE and Part C adjusted for Total Assets

Correlation
.1944
P-Value
.3313
27
R-Squared
.03779
Figure 6. Relationship of ROE and Part C Adjusted for Total Assets.
113
Part C covers the Role of Stakeholders. Stakeholders comprise of employees,

customers, suppliers and the local community. There was a small positive correlation
between The Role of Stakeholders and ROE, r(25) = .1944, with Shareholders Rights
explaining only 3.78% of the variation in ROE. The results are not statistically significant at
the 95% confidence level. There is a 33.13% probability that the correlation obtained
occurred by chance. In one article entitled Stakeholder Relations Sustain Positive
Financial Performance cited by Network for Business Sustainability (NBS) in its website,
it talked about how stakeholder relations sustain positive financial
performance, it
mentioned that when a firm performs well (above average for its industry), good stakeholder
relations help sustain it for a longer period of time. Employees may work harder, or
customers will buy more products or pay more for them. NBS also mentioned that
stakeholder relations dont lead to persistently higher performance levels over time; for that,
successful firms must rely on other competencies like technological expertise. This
implies the idea that good corporate governance practice may not really cause better ROEs
for companies but only helps sustain it.
D. Relationship of ROE and Part A adjusted for Total Assets

Correlation
-.0356
P-Value
.8601
27
R-Squared
.00126
114
Figure 7. Relationship of ROE and Part D Adjusted for Total Assets.

The result showed that there was a small negative correlation, r(25) = -.0356 between
the disclosure and transparency practices with the companys return on equity. Disclosures
and Transparency only had .126% probability in explaining the variation in ROE. The results
are not statistically significant at the 95% confidence level with an 86.01% probability that the
correlation obtained occurred by chance. Accordingly, Stiglbauer (2010) transparency and
disclosure practices provided no significant impact of on the companys performance.
Furthermore, it was stated that although transparency and disclosure on corporate governance
may not improve a firms operating performance, it improves investors perception of the
governance of companies, with the resultant impact on firm value.
115
E. Relationship of ROE and Part E adjusted for Total Assets

Correlation
.0083
P-Value
.9673
27
R-Squared
.00007
Figure 8. Relationship of ROE and Part E Adjusted for Total Assets.

Figure 8 (Scatter Plot Graph) displays the graphical delineation of the correlation
between the respective companies' Corporate Governance practices concerning matters related
to the Responsibilities of the Board as measured by their respective weighted scores in the
ICD Scorecard Part E questionnaire and their financial performance as measured by ROE.
The relationship between the two variables has been assessed. There was a small positive
correlation between the Responsibilities of the Board and ROE, r(25) = .0083, with The
Responsibilities of the Board explaining only .007% of the variation in ROE. The results are
not statistically significant at the 95% confidence level. There is a 96.73% probability that
the correlation obtained occurred by chance.
116
The researchers have found that Parts B, C and E (taken individually) have weak
positive correlation with ROE while Parts A and D have negative but not statistically significant
correlation with ROE. Overall, there was no correlation between good corporate governance as
evaluated using the OEC Scorecard and firm financial performance as measured by ROE. With
this, the researchers chose to accept the Null Hypothesis: There is no correlation between
Financial Performance and Corporate Governance in Indonesia and Reject the Alternative
Hypothesis: There is a correlation between Firm Performance and Corporate Governance in
Indonesia.
Notwithstanding the foregoing, the researchers wished to contribute to the greater body
of knowledge by developing a Framework as shown in Figure 9.
117
Framework
(Dont print this page. Framework is located on a separate file.)
118
Based on the findings of the study, a Framework for Indicators of Profitability by means
of Good Corporate Governance has been developed as depicted in Figure 9. The GCG practices
include those which have been found prominently practiced by most Indonesian companies and
which garnered the top two highest ratings within respective OECD subcategories/ components
that have established a positive, albeit weak, correlation with ROE (i.e. practices under Parts B,
C & E.) Based on the findings, the application of these practices tends to have a small degree of
impact on companys performance as measured by ROE. Nonetheless, the researchers deemed it
a good strategy for Indonesian companies to enhance their Good Corporate Governance practices
in pursuit of a sustained and improved long-run profitability.
Greater emphasis and priority was placed upon these practices, as shown in the right
portion of the Framework, due to their positive, albeit, weak correlation with company financial
performance as measured by ROE. Such priority is established based on the relative strength of
their correlation with ROE. Part C exhibited the strongest positive correlation among the
components, followed by B and then by E. For this reason, the researchers deemed it best for
Indonesian companies to implement, or strengthen the implementation of, good corporate
governance practices on the basis of such precedence.
On the other hand, despite the findings obtained for Parts A & D, which revealed that
such components had a weak negative correlation with ROE, selected practices under such
components were likewise included in the Framework because the negative correlation was
found to be only immaterial and would thus not prompt omission from the Framework. It is to be
noted, however, that among the five (5) components of the OECD Scorecard, Part A had the
strongest correlation with ROE, although still within a statistically significant range of p value.
As explained in the foregoing Correlation section, shareholder rights and company financial
119
performance oftentimes do not come in agreement with each other due to the inherent conflict of
interest between shareholders and managers, as explained by the Agency theory. Moreover, in
the free market system and in the long-term, the two [preservation and growth of the business
and the maximization of shareholder wealth] will automatically coincide, even if in the shortterm they diverge (Sanghoee, 2014). Therefore, the researchers opted to include Part A practices
as indicators of profitability.
The same applies for Part D Disclosure and Transparency. Although, a weak negative
correlation with ROE was established in the findings, the researchers included several practices
under said component because of the immaterial degree of negative correlation, as indicated by
the applicable p value.
Despite the negative correlation between Parts A & D (taken individually) with ROE, the
researchers included such practices in the Framework because enhancement of shareholder
rights and reduction of ownership structure in favor of few large institutional investors have
direct relationship with firm value, investment returns and financial distress (Bonna, 2012).
It must be noted, however, that as indicated in the Framework, greater emphasis is placed
upon Parts B, C & E because they demonstrate a positive, albeit weak, correlation with ROE.
Parts A & D practices may be enhanced but with lesser emphasis and prominence if the ultimate
goal is to continuously improve financial performance.
Although there are too great a number of factors influencing a firms profitability,
consistent application of good corporate governance practices will ultimately lead to a stable
financial condition in the long-run and may therefore be included in the priority practices of a
company as the Board may see fit to the company culture and goals.
120
The researchers want to note that for the present time that Good Corporate Governance
Practices in Indonesia are not yet entirely embraced and applied by most companies, the benefits
offered by implementing such practices may not be readily observed. But as with fully developed
countries, Good Corporate Governance must be considered with utter cautiousness and
dedication.

Presentation, Analysis and Interpretation of Data: Part A - Rights of Shareholders (N 30)

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Presentation, Analysis and Interpretation of Data: Part A - Rights of Shareholders (N 30)

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56

A.1 Basic Shareholder Rights (Average)

Does the company pay (interim and final/annual) dividends in

A.5 Active participation of shareholders in

Does the Company publicly disclose policy/practice to

A.2 Participation of shareholders in

Amendments to the company's constitution?

The authorisation of additional shares?

The transfer of all or substantially all assets, which in effect

A.3 Effective voting procedures in a general

Did the company organise their most recent AGM in an easy

Does the company allow shareholders to elect

Does the disclosure of the outcome of the most recent AGM

Do shareholders have the opportunity, evidenced by an

Does the company provide the rationale and explanation for

Does the company disclose the voting results including

Did the chairman of the board of directors/commissioners

Did the CEO/Managing Director/President attend the most

Does the company disclose that it has appointed an

Does the company disclose the list of board members who

Does the company make publicly available by the next

Does the company disclose the voting and vote tabulation

Did the chairman of the Audit Committee attend the most

Do companies provide at least 21 days notice for all

Does the company provide non-controlling shareholders a

Do the minutes of the most recent AGM record questions and

Does the company allow for voting in absentia?

A.4 Corporate control in the fairness of the

In cases of mergers, acquisitions and/or takeovers requiring

Do the company's ordinary or common shares have one vote

B.5 Protect minority shareholders from

Were there any RPTs that can be classified as financial

Does the company disclose that RPTs are conducted in such

In case of related party transactions requiring shareholders

B.2 Notice of AGM (Average)

Are the companys notices of the most recent AGM/circulars

Is the amount payable for final dividends disclosed?

Were the proxy documents made easily available?

Has an explanation of the dividend policy been provided?

Are the profiles of directors/commissioners (at least age,

Are the auditors seeking appointment/re-appointment clearly

B.4 Related party transactions by

Does the company have a policy requiring board members

Does the company have policies on loans to directors and

Does the company have a policy requiring a committee of

Does the company have policies and/or rules prohibiting

Are the directors / commissioners required to report their

B.3 Insider trading and abusive selfdealing should be prohibited (Average)

(Note: N/A represents also those data that cannot be obtained)

C.2 Stakeholders opportunity to redress

Does the company provide contact details via the

C.3 Develop performance-enhancing

Does the company have training and development

Does the company publish relevant information on training

Does the company explicitly disclose the health, safety, and

Does the company publish relevant information relating to

Does the company have a reward/compensation policy that

C.4 Communicate illegal or unethical

Does the company have procedures for complaints by

Does the company have a policy or procedures to protect

C.1 Respect for rights of stakeholders

Elaborates the company's efforts to interact with the

Does the company have a separate corporate responsibility