Corporate Governance in Indonesia: Management of a Company

Indonesia's Company Law (Law No 40 of 2007 regarding Limited Liability Companies, as last amended by the provisions of the Job Creations Law) recognizes three primary bodies within the corporate structure of Indonesian companies: the board of directors (BOD), the board of commissioners (BOC), and the general meeting of shareholders (GMS). Each of these principal bodies holds distinct functions and authorities.

According to the Company Law, the BOD is entrusted with managing the company in alignment with its purposes and objectives, and in the best interests of the company. In exercising its management authority, the BOD has the capacity to oversee the company’s assets, enter into contracts on behalf of the company, and generally represent the company both in and out of court. Despite the breadth of its management powers, the BOD operates under certain constraints as delineated by law and/or the company’s articles of association.

The BOC is tasked with supervisory and advisory functions directed towards the BOD, ensuring that the company’s interests and objectives are pursued effectively. The GMS holds decision-making authority that surpasses that granted to the BOC and BOD, as stipulated by the Company Law or the company’s articles of association.

Decisions Made by Particular Bodies

Given that the BOD is vested with the authority to conduct the management of the company, all decisions related to the company’s management fall under the purview of the BOD. However, these powers may be subject to limitations as specified in the law or the company’s articles of association. For example, if the BOD intends to sell or encumber company assets with a value exceeding 50% of the net assets of the company in one or more transactions, or to undertake a merger with another company, the BOD must seek approval from the GMS.

Generally, as the BOC only has the authority to supervise and provide advice to the BOD, it does not make decisions related to the management of the company. However, there are instances where decisions of the BOC are also required for the company to undertake certain actions.

For example, if during a fiscal year the company intends to distribute interim dividends to shareholders (assuming the requirements under the Company Law for such action are fulfilled), the BOD cannot proceed with this action without the approval of the BOC. Additionally, the company’s articles of association may give the BOC the authority to approve specific management actions to be taken by the company.

Under the Company Law, the GMS holds authorities that the BOD and BOC are not allowed to exercise and therefore shall make various key decisions for the company. These decisions include:

• appointment of members of the BOD and BOC;
• amendments to the company’s articles of association;
• payment of annual dividends;
• liquidation of the company; and
• certain corporate actions such as acquisitions, consolidations, mergers, and spin-off of the company.

Similar to the BOC, the company’s articles of association may grant additional authorities to the GMS to approve specific actions to be taken by the company.

Decision-Making Processes

Generally, every decision made by each body of the company is taken in accordance with the decision-making mechanism applicable to such body as regulated in the Company Law and/or the articles of association.

However, it should be noted that the Company Law does not explicitly regulate how decisions in the BOD or the BOC for private companies are made. The Company Law does not prescribe any requirements regarding how the BOD or BOC conduct board meetings or make decisions therein. Therefore, in practice, the articles of association of each company may contain provisions regarding the conduct of board meetings and the decision-making procedures therein.

Despite the above, it should be noted that, based on Article 98, paragraph 2 of the Company Law, if the BOD consists of more than one member, then each member of the BOD has the right to act for and on behalf of the company unless otherwise specified in the articles of association. This means that specific directors may be authorized to take actions on behalf of the company without having to wait for a collective decision from the BOD, as long as they are appointed as authorized directors to represent the company.

In contrast, when the BOC makes certain decisions, these decisions must be made collectively by the BOC, and no individual member of the BOC can act to represent the BOC in making decisions. This is based on the principle stated in Article 108, paragraph 4 of the Company Law, which states that if the BOC consists of more than one member, then each member of the BOC cannot act individually but must act based on decisions made by the BOC as a whole.

Unlike the provisions for the BOD and BOC, the Company Law extensively regulates how decisions can be validly made in the GMS. In short, the Company Law has established formal procedures regarding the conduct of GMS, such as how a formal GMS request is to be submitted and how the GMS invitations are to be delivered to shareholders, as well as the quorum requirements and decision-making process in the GMS.

Excerpted from the Corporate Governance 2024 Chambers Global Practice Guide, published by Chambers and Partners.

Find Corporate Governance: Indonesia here.

Further reading:

ESG Reporting Requirements in Indonesia

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