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From CEO to Chairman of the Board – A Governance Perspective

There is a recent news on the appointment of Chairman of the Board of Commissioner of one of the largest banks in Indonesia which previously the President Director/CEO of the company.

I will not be discussing whether this is allowable or not, or whether this is right or wrong. You can be the judge of it. I am trying to discuss the governance perspective of it, from an independency point of view.

In Indonesia, corporation adopt the two-board system approach, in where members of the Board of Directors (Direksi or Dewan Direktur) is equivalent to the Executive Director in a one-board system and members of the Board of Commissioners (Dewan Komisaris) is equivalent to Non-Executive Director in a one-board system.

Based on Indonesia Company Law No.40 of Year 2007:

  • “Board of Directors” means an Organ of the Company with the sole authority and responsibility for the management of the Company in the best interest of the Company within the objectives and purposes of the Company, and represents the Company both within and outside the court of law under the articles of association.

  • “Board of Commissioners” means an Organ of the Company with duties to make general and/or specific supervision under the articles of association, as well as to provide advice to the Board of Directors.

Based on the that we can understand that Board of Commissioners is responsible in supervising and advising the Board of Directors.

Ideally as a supervising board, you would like for the board to be structured with majority independent members, but if that is not possible, at least the Chairman of the Board of Commissioner is strongly recommended to be independent.

To describe as “independent” carries with it a connotation that the person is not aligned with the interests of management or a substantial holder and can and will bring an independent judgement to bear on issues before the board. It is an appellation that gives great comfort to shareholders and not one that should be applied lightly.

A commissioner (non-executive director) of a listed entity should only be characterised and described as an independent if he or she is free of any interest, position or relationship that might influence, or reasonably be perceived to influence, in a material respect their capacity to bring an independent judgement to bear on issues before the board and to act in the best interests of the entity as a whole rather than in the interests of an individual shareholder or other party.

The ASEAN Corporate Governance Scorecard prohibit the CEO of listed entity to be Chairman (President Commissioner / Chairman of the Board of Commissioners) if a 3 years cooling period has not passed.

There is also guidance that we can use on factors relevant to assessing the independence recommended by ASX Corporate Governance Principles and Recommendations 4th edition 2019.

Examples of interests, positions and relationships that might raise issues about the independence of a director of an entity include if the person is, represents, or is or has been within the last three years an officer or employee of, or professional adviser to, a substantial holder;

Why is it important?

A person who represents or is or has been within the last three years an officer or employee of, or professional adviser to, a substantial holder is likely to have a bias towards the individual interests of that substantial holder rather than the interests of shareholders generally.

In auditor perspective, independency is mandatory. To ensure independence, auditor must refrain themselves from assessing the areas they previously manage, as it will create a self-review threat; that is to mitigate the risk of bias in the conclusion and opinion provided.

I am not opposing appointment of former CEO as Chairman prior 3 years period lapse. It is just that that person cannot be regarded as independent. Will it give or diminish value that the board can deliver? I think value is based on many things and not exclusively on independency.


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