Indonesia Plans Scorecards to Boost Corporate Governance

Indonesia’s Financial Services Authority plans to publish scorecards rating companies on the quality of their corporate governance as it begins supervising capital markets in Southeast Asia’s biggest economy.

The agency plans to rate the nation’s 50 biggest listed companies this year, said Muliaman Hadad, chairman of the newly minted regulator known by its Indonesian acronym of OJK. How companies treat minority shareholders and the roles played by board directors are among the criteria, he said in an interview in Jakarta on Jan. 15. OJK will consolidate supervision of capital markets, banks and non-bank financial institutions.

Hadad, a former central bank deputy governor, wants companies to improve practices to lure investors and broaden the pool of capital to fund growth. Indonesia’s economic recovery since the Asian financial crisis in 1997-1998, when the nation had to seek an International Monetary Fund bailout, has prompted Fitch Ratings and Moody’s Investors Service to raise their sovereign debt scores to investment grade.

“The market has high hopes with the establishment of OJK,” said Fadlul Imansyah, a Jakarta-based fund manager at CIMB-Principal Asset Management, which oversees about 2.1 trillion rupiah ($215 million) of assets. “The financial system cannot be divided into parts because what’s out there in the market is connected with one another.”

Hadad said the authority will study the corporate governance scorecards introduced by Thai regulators in the wake of the 1997 Asian financial crisis.

Excellent Qualities

Capital markets should be the main funding source instead of banks, Hadad said. Companies raised 90.8 trillion rupiah in stock and bond sales last year, data compiled by Bloomberg show, while net new loans by commercial banks reached 431.4 trillion rupiah as of November, according to Bloomberg calculations based on central bank data.

Indonesia’s stock market is the third largest in Southeast Asia behind Malaysia and Singapore. Its biggest stock by market value is PT Astra International, the nation’s largest auto retailer that also owns a palm oil producer, a mine contractor and a banking venture with Standard Chartered Plc.

“We’d like to see how companies implement sound corporate governance so investors are confident that these companies are in good hands,” said Hadad, 52. “The top 50 at least should reflect excellent qualities.”

OJK took over the regulatory and supervisory roles of the capital market, insurance, pension fund and financing industries from the Finance Ministry and the ministry’s capital market supervisory agency on Jan. 1, and will assume oversight of lenders from the central bank at the start of next year.

Clear Enforcement

OJK aims to strengthen its enforcement role and boost its information-gathering capacity to improve corporate governance, Hadad said, adding he will also look into existing disclosure rules to identify potential improvements.

“Enforcement is key,” Hadad said, referring to all publicly listed companies. “Violations need to be followed up on, sanctions have to be clear and exercised.”

London-listed Bumi Plc, co-founded by Nathaniel Rothschild, said Sept. 24 it has begun a probe into “potential financial and other irregularities” at its Indonesian operations, including PT Bumi Resources, the nation’s biggest coal producer.

Shares of Bumi Resources slumped 73 percent last year as coal prices fell and the company reported a nine-month net loss after a $422 million charge on derivative transactions.

OJK is monitoring the Bumi case to see whether disclosure rules have been upheld and investors’ interests protected, Hadad said. The agency will wait for results of the inquiry, including one initiated by the company’s audit committee, he said, declining to comment further on the case.

Thai Model

Thailand requires that more than 500 listed companies fill in a questionnaire and ranks them in areas such as board composition, the profile of their auditors and carbon emissions.

The scorecards have “worked very well to improve the corporate governance at Thai listed companies,” said Bordin Unakul, head of the corporate services division at Thailand’s stock exchange. “If you don’t return the questionnaire it means zero score, so most companies are very cooperative.”

Indonesia’s Hadad has a master’s degree in public education from Harvard University and a doctorate in business and economics from Monash University in Melbourne. He leads a board that includes Nelson Tampubolon, a former director in the International Directorate at the central bank; Nurhaida, the former chairwoman of the Financial Market and Financial Institutions Supervisory Agency at the Ministry of Finance; and Rahmat Waluyanto, the former director general of debt management at the Ministry of Finance.

Market Performance

The Jakarta Composite index rose 13 percent last year as gains in construction, infrastructure and consumer stocks outweighed declines among mining stocks.

Bonds rose for a fourth straight year, returning 13.9 percent in 2012, the highest among Asian emerging bonds, according to HSBC Holdings Plc. The rupiah was the worst-performer among Asia’s 10 most-traded currencies excluding the Japanese yen, declining 5.9 percent, the most since 2008.

Indonesia’s economy grew 6.17 percent in the three months ended Sept. 30 from a year earlier, holding above a 6 percent pace for an eighth quarter. Bank Indonesia has kept its key interest rate at a record low of 5.75 percent for 11 months, helping boost investment and consumer spending. Private spending in the world’s fourth-most populous nation accounts for 63 percent of the economy, according to government data.

Astra, Unilever

Economic growth is helping companies such as Astra sell more cars and encouraged Unilever, the world’s second-biggest consumer goods company, to build a $150 million plant on Sumatra island to make ingredients for soap and shampoos. Domestic investment rose 33 percent and foreign direct investment gained 22 percent in the third quarter from a year earlier, government data show.

Fitch upgraded Indonesia’s long-term foreign and local currency rating to BBB- with a stable outlook in December 2011, giving the country an investment grade rating for the first time since the Asian financial crisis. Five weeks later Moody’s Investors Service raised the foreign- and local-currency rating to Baa3 from Ba1.

The IMF arranged more than $100 billion of loans to Thailand, Indonesia and South Korea after their currencies collapsed during the 1997-1998 crisis. Hundreds of Indonesian companies, including more than a dozen banks, had became insolvent because they had loaded up on borrowing in dollars.

In return for the bailout, governments were forced to cut spending, raise interest rates and sell state-owned companies. Indonesia repaid its debt in 2006, four years before schedule.

“The financial industry will develop at a fast pace,” Hadad said. “If you ask me how attractive our capital market is, I say it’s very attractive since it’s a reflection of our economy’s potential.”

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