Corporate Governance in Indonesia: What You Should Know About Shareholder Resolution

Corporate governance plays a critical role in ensuring that companies operate effectively, transparently, and in compliance with legal and ethical standards. 

In Indonesia, corporate governance is shaped by a combination of statutory laws, regulations, and best practices. Shareholder resolutions, as a key aspect of corporate governance, provide a mechanism for shareholders to influence the direction and management of a company. 

This essay explores the legal framework governing shareholder resolutions in Indonesia, focusing on the 2023 Job Creation Law (commonly referred to as the Omnibus Law), the 2007 Company Law, and other relevant regulations.

The Legal Framework for Corporate Governance in Indonesia

Indonesia’s corporate governance framework is primarily governed by the 2007 Company Law (Law No. 40 of 2007 on Limited Liability Companies). This law outlines the rights and responsibilities of shareholders, directors, and commissioners, as well as the mechanisms for decision-making within companies. Additionally, the 2023 Job Creation Law (Law No. 6 of 2023) introduced significant amendments to various laws, including the 2007 Company Law, to streamline business processes and enhance investor confidence.

Other key regulations include the Financial Services Authority (OJK) Regulations, which govern publicly listed companies, and the Indonesia Stock Exchange (IDX) Listing Rules, which impose additional governance requirements on listed entities. Together, these laws and regulations aim to create a robust corporate governance framework that balances the interests of shareholders, management, and other stakeholders.

Shareholder Resolutions: Definition and Importance

A shareholder resolution is a formal proposal submitted by shareholders for consideration and voting at a general meeting. Resolutions can address a wide range of issues, from corporate strategy and financial matters to environmental, social, and governance (ESG) concerns. In Indonesia, shareholder resolutions are a vital tool for ensuring accountability and transparency in corporate decision-making.

Under the 2007 Company Law, shareholders have the right to participate in general meetings and vote on resolutions. These resolutions can be classified into two main categories:

1. Ordinary Resolutions. These typically require a simple majority (more than 50%) of votes to pass and cover routine matters such as approving financial statements or appointing directors.
2. Extraordinary Resolutions. These require a higher threshold, often two-thirds or more of the votes, and are reserved for significant decisions such as amending the company’s articles of association, mergers, or dissolutions.

The ability to propose and vote on resolutions empowers shareholders to influence the company’s governance and strategic direction.

Shareholder Rights Under the 2007 Company Law

The 2007 Company Law provides a comprehensive framework for shareholder rights, including the right to propose resolutions. Key provisions include:

1. Right to Attend and Vote. Shareholders have the right to attend general meetings and vote on resolutions in proportion to their shareholding. This ensures that all shareholders, regardless of size, have a voice in corporate governance.
2. Right to Propose Resolutions. Shareholders holding at least 10% of the company’s shares (or a lower threshold if specified in the articles of association) can propose resolutions for inclusion in the agenda of a general meeting. This provision enables minority shareholders to raise issues of concern.
3. Right to Information. Shareholders are entitled to receive timely and accurate information about the company’s performance, financial position, and governance practices. This right is essential for making informed decisions on resolutions.
4. Right to Challenge Decisions.  Shareholders who disagree with resolutions passed at a general meeting can challenge them in court if they believe the resolutions violate the law or the company’s articles of association.

These rights are designed to protect shareholders and promote good governance within companies.

Impact of the 2023 Job Creation Law on Shareholder Resolutions

The 2023 Job Creation Law introduced several changes to the 2007 Company Law, with implications for shareholder resolutions. Key amendments include:

1. Simplification of General Meeting Procedures. The Job Creation Law allows companies to hold electronic general meetings, making it easier for shareholders to participate and vote on resolutions. This is particularly beneficial for companies with a dispersed shareholder base.
2. Lowering the Threshold for Proposing Resolutions.  The law permits companies to set a lower threshold for shareholders to propose resolutions, subject to approval in the articles of association. This change enhances the ability of minority shareholders to influence corporate governance.
3. Streamlining Decision-Making. The Job Creation Law simplifies decision-making processes for certain resolutions, such as mergers and acquisitions, by reducing procedural requirements. This aims to facilitate business transactions while maintaining shareholder oversight.
4. Strengthening Minority Shareholder Protections. The law introduces additional safeguards for minority shareholders, including the right to demand a buyout of their shares if they disagree with certain resolutions. This provision ensures that minority interests are not overlooked in major decisions.

These amendments reflect the government’s commitment to improving the business environment and aligning Indonesia’s corporate governance practices with international standards.

Challenges in Implementing Shareholder Resolutions

Despite the legal framework, there are several challenges in implementing shareholder resolutions in Indonesia:

1. Limited Awareness. Many shareholders, particularly retail investors, are unaware of their rights and the mechanisms for proposing resolutions. This limits their ability to participate effectively in corporate governance.
2. Concentrated Ownership.  Indonesian companies often have concentrated ownership structures, with controlling shareholders or family-owned groups holding significant influence. This can undermine the effectiveness of shareholder resolutions, as minority shareholders may struggle to gain support for their proposals.
3. Lack of Enforcement. While the laws provide robust protections for shareholders, enforcement remains a challenge. Disputes over resolutions can be time-consuming and costly, discouraging shareholders from pursuing legal remedies.
4. Cultural Factors. In some cases, cultural norms and business practices may discourage open dissent or challenges to management decisions, further limiting the impact of shareholder resolutions.

Addressing these challenges requires a combination of legal reforms, investor education, and cultural change.

Best Practices for Shareholder Resolutions

To enhance the effectiveness of shareholder resolutions, companies and shareholders should adopt the following best practices:

1. Transparent Communication.  Companies should provide clear and timely information about general meetings, including the agenda and proposed resolutions. This enables shareholders to make informed decisions.
2. Engagement with Shareholders.  Companies should actively engage with shareholders, particularly minority investors, to understand their concerns and priorities. This can help build trust and prevent disputes.
3. Use of Technology: Electronic voting and virtual meetings can increase shareholder participation and reduce logistical barriers. Companies should invest in technology to facilitate these processes.
4. Capacity Building. Shareholders, especially retail investors, should be educated about their rights and the procedures for proposing and voting on resolutions. This can empower them to play a more active role in corporate governance.
5. Collaboration Among Shareholders. Minority shareholders can collaborate to pool their resources and influence, increasing the likelihood of their resolutions being considered and adopted.

By adopting these practices, companies and shareholders can strengthen corporate governance and promote sustainable growth.

Conclusion

Shareholder resolutions are a cornerstone of corporate governance in Indonesia, providing a mechanism for shareholders to influence the direction and management of companies. The 2007 Company Law and the 2023 Job Creation Law establish a comprehensive legal framework for shareholder rights, while recent amendments aim to enhance transparency, accountability, and investor confidence.

However, challenges such as limited awareness, concentrated ownership, and enforcement issues remain. Addressing these challenges requires a concerted effort from regulators, companies, and shareholders to promote best practices and ensure that shareholder resolutions are an effective tool for corporate governance.

As Indonesia continues to develop its economy and attract foreign investment, robust corporate governance practices, including the effective use of shareholder resolutions, will be essential for building trust and fostering sustainable growth. By understanding the legal framework and adopting best practices, shareholders can play a pivotal role in shaping the future of corporate governance in Indonesia.

My name is Asep Wijaya. Thank you for reading my posts!