GCG and Board Leadership

SBM – ITB
School of Business and Management
Corporate Governance and

Board Leadership
Presented by
Leo J. Susilo
SBM – ITB
Sekolah Bisnis dan Manajemen Objectives
• Providing information about corporate

governance and what are board of directors’
responsibilities
• To understand other components to implement
responsible corporate governance practices
Notes: This lecture material is developed based on material on

Corporate Governance and Board Leadership published by
International Finance Corporation, 2008
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Sekolah Bisnis dan Manajemen Agenda
1. Introduction
2. Corporate Governance
3. The Board
4. Strategic Leadership
5. Financial Stewardship and Accountability
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Introduction
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Sekolah Bisnis dan Manajemen Introduction
Corporate Governance context

Market driven
Profit / performance
ECONOMY
responsibility
GCG Regulatory driven

implementation Compliance
responsibility
Ethics driven responsibility
Conformance
responsibility
LAW
ETHICS
Source: Harvard Business School (2005)

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Essence of Corporate Governance

STRUCTURE PROCESS
• GMoS
• BOARD OF • SHAREHOLDERS MTG
ETHICAL & • BOARD MEETING COMPLIANCE &
LEGAL NORM COMMISSARIES
• BUSINESS PLAN CONFORMANCE
(Mandatory) • BOARD OF DIRECTORS • AUDIT REPORT
• AUDIT COMMITTEE • ANNUAL REPORT
• CORP SECRETARY CORP.
REASON FOR TARGETS,
EXISTENCE GOALS,
(CORP. OBJECTIVES,
MISSION) VISION
• STRATEGIC MGNT • Impl of Risk Mgmnt
BEST
PRACTICES
• RISK MGMNT DIV • Impl. of ISO 9000 series
AND CORP. • QLTY MGMNT DIV • Service Exelence PERFORMANCE
BEHAVIOR • MARKETING DIV Program
(Voluntary) • HR MGMNT DIV • Competency Based HRM
• FIN & ACCT DIV • Impl. of ABC System
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Chronological endeavor to implement GCG in Indonesia
1997 Good Corporate Governance (GCG) clause in Letter of Intent (LoI)

as a part of Banking Reformation & Restructuring
Establishment of National Committee on Corporate

1999
Governance (NCGCG / KNKCG)
1.Establishment of NGOs, who are concern for GCG

2000 implementation (now is about 9 organizations exist)
2.GCG Implementation is put in LoI with IMF
1.Indonesian Code on GCG was published by NCGCG

2. For the first time The Indonesian Institute for Corporate
2001
Governance (IICG) conducted survey on Corporate
Governance Perception Index (CGPI)
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1. SOE Ministerial Decree No.117/2002 on Implementation of GCG in

2002 SOE and formation of Audit Committee in SOE
2. Corporate Annual Report Award contest
1. Bapepam (Capital Market Authority) issued the rule on periodical

2003 report and Director’s liability on financial report.
2. GCG is a part of Indonesian Banking Architecture rule
1. KNKCG issued Banking GCG Code and Code for Audit Committee;
2. Bapepam issued rule for Audit Committee, Directors and
Commissaries;
2004 3. SOE Minister issued decree on Management Contract for Directors
and Commissaries of SOE;
4. Changes of KNKCG become Komite Nasional Kebijakan Governance
(KNKG / NCCG), which consists of Public Governance Subcommittee
and Corporate Subcommittee.
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1. NCCG declared its “Destination Statement” to put

Indonesia into “Top quartile of international rating in GCG
2005 implementation Index” in 2009.
2. GCG implementation is becoming consideration in award
giving by various parties.
1. Indonesian Central Bank issued Act (PBI) on GCG

Implementation for Bank
2006 2. SOE Minister issued a decree on Requirement and
Procedures for Directors and Commissaries Promotion;
3. KNKG issued GCG Code for Insurance Industry
4. KNKG issued revised Indonesian Code on GCG,
Parliament passed new Company Law and new Investment

2007
Law, which both have CSR clause.
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2008 Revision on Corporate Governance Code for Insurance

Industry
1. NCCG published technical code to enforce GCG
implementation, that is, Guideline for Implementation of
Whistle Blowing System
2009 2. Final draft of Public Governance Code was finalized and
waiting for the endorsement by the Government
3. Final draft for Guideline on Corporate Code of Ethics is
ready for further discussion in joint session of Indonesian
Chamber of Commerce and Industry (KADIN Indonesia) and
1. NCCG
NCCG has published “Guideline on Corporate Code of
Business Ethics”,
2010 2. NCCG jointly with Indonesian Chamber of Commerce &
Industry (KADIN) sponsored “Business Community against
Bribery” (Komunitas Pengusaha Anti Suap – KUPAS)
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1. NCCG published GCG code for Syariah Banking

2011 2. Final draft for Guideline on Enterprise Risk Management is
ready to be published
1. NCCG published Guideline on Enterprise Risk Management

2012
2015 1. NCCG revised Code of Corporate Givernance
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Strong Corporate Governance Attracts Investors
• Capital will flow elsewhere if:

– A country does not have a reputation for strong
corporate governance practices
– Investors are not confident of the level of disclosure
– A country opts for lax accounting and reporting
standards
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Corporate Governance
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Sekolah Bisnis dan Manajemen Corporate Governance
What is Corporate governance?

“Corporate governance is the system
by which companies are directed
and controlled….”
Sir Adrian Cadbury, UK, 1992
Corporate governance is integrating law and ethics

in managing the corporation and managing
opportunity and risk
(Brian L. Nelson, 2006, Law and Ethics in Global Business.) 15
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What is “governance” in daily corporate life?

It consist of three major areas, ie:
▪ Setting policies : define and communicate the rules and
procedures with which all (internal and external) stakeholders
must comply;
▪ Setting authority and responsibility level : define and
communicate the key roles of individuals involved in business
processes and in corporate oversight, and the specific
responsibility of each person;
▪ Ensuring accountability and oversight : define processes and
feedback mechanism (reporting) so that progress toward
governance goals can be measured and communicate
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What is “governance”?
❑ In essence “governance” is the leadership, organizational
structures and processes that help ensure that an
organization’s functions sustain and extend it strategies to
achieve the objectives.
❑ Put it simpler, it is the culture, policies, procedures and
controls that help ensure the organization will meet its goals.
❑ There is governance of a company and governance of
everything that relates to the operation of the company, such
as finance governance, risk governance, IT governance,,
compliance governance, manufacturing governance,
marketing governance, human capital governance, etc.
❑ The goal of governance is creating value for the corporation
and create accountability and transparency across the
business processes.
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Corporate governance means leadership ….

❑ For efficiency in order the companies to compete effectively in
the global economy and thereby to create jobs
❑ For probity because investors require confidence and
assurance that the management of a company will behave
honestly and with integrity in regard to their shareholders and
others
❑ For responsibility as companies are increasingly called upon
to address legitimate social concerns relating to their activities
❑ For transparency and accountability because otherwise
business leaders cannot be trusted and this will lead to the
decline of companies and the ultimate demise of country’s
economy
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Agency and stewardship
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Five elements of Corporate Governance
The five key elements of

good corporate governance
environment and processes
disclosure and transparency
Protection of (minority)
Good board practices
Appropriate control
shareowner rights
Strong regime of
Strong commitment to corporate governance reforms

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Elements of good governance ………

❑ Good board practices; clearly defined roles and authorities of the
Board and its supporting organ;
❑ Effective control environment; availability of audit, risk
management and other control mechanism and run effectively;
❑ Well defined shareholders rights; minority shareholders right
are formalized, policy on related party transactions and
extraordinary transaction, clearly defined dividend policy;
❑ Transparent disclosure; financial and non-financial information
disclosure, financial reporting according IFRS/PSAK, high quality
annual reporting;
❑ Board commitment to good governance; board championing
and sponsoring establishment of policies and procedures,
establishment of code of conducts, monitoring and review the
implementation of good governance processes.
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The pillars of Corporate Governance
❑ Transparency; Directors should clarify to shareholders and
other stakeholders why every material decisions have been
made;
❑ Accountability; Directors should be held accountable for their
decisions and actions to shareholders, and in certain cases,
key stakeholders, submitting themselves in rigorous scrutiny;
❑ Responsibility; Directors should carry out their duties with
honesty, probity and integrity;
❑ Independent; Directors when executing their duties, they
should put the company’s interest first and should free from
any interventions including from shareholders. (This is
specific for Indonesia)
❑ Fairness; All shareholders should receive equal, just, and
unbiased consideration by the Directors and management;
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OECD Principles of Corporate Governance

• Ensuring the basis for an effective corporate governance
framework
• Rights of shareowners and key ownership functions
• Equitable treatment of shareowners
• Role of stakeholders in corporate governance
• Disclosure and transparency
• Board responsibilities
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Corporate Governance system
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Competing tensions
If management is
about running business,
governance is about
seeing that it is run
properly. All companies
need governing as well
as managing.”
Prof. Bob Tricker, 1984
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A company’s corporate governance system
LAWS,
REGULATIONS
ARTICLES OF CORPORATE BOARD CODE OF POLICIES AND
RULES
ASSOCIATION GOVERNANCE MANUAL / ETHICS PROCEDURES
(ESPECIALLY
CODE CHARTER
CORPORATE
LAW)
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Sekolah Bisnis dan Manajemen
Peraturan perundangan dan turunannya:

1. UU tentang Perseroan Terbatas
2. UU lain terkait dengan PT (UU PM, PSAK, dll)
3. UU lain terkait dengan operasi perusahaan
Anggaran Dasar Perusahaan
Hierarchy of rule and

Panduan GCG yang meliputi: regulation for corporate
1. Prinsip-prinsip GCG
2. Panduan GCG (GCG Code); governance in Indonesia
3. Panduan Direksi dan Dewan Komisaris (Board Manual)
4. Piagam Komite Audit dan Komite-Komite lainnya;
5. Piagam Internal Audit;
6. Panduan Etika Bisnis dan Perilaku (Code of Conduct and
Business Ethics);
7. Panduan Whistle Blowing System (optional)
8. Panduan Management of Anti Fraud System (optional)
Manual Manajemen Risiko: Manual Manajemen Keuangan: Manual Manajemen Operasi:

• Manual Manajemen
Kebijakan MR Risiko: • Manual
PSAK Manajemen Keuangan: • Manual
StandarManajemen
Industri Operasi:
• •Standar
Kebijakan MR digunakan
MR tang • •Kebijakan
PSAK Mgt Keuangan • •Kebijakan
StandarMgt
Industri
Operasi
• •Prosedur
Prosedur
MRMR • •Prosedur
Kebijakan
MgtMgt Keuangan
Keuangan • •Prosedur
Kebijakan
MgtMgt Operasi
Operasi
• Dokumentasi
• Dokumentasi dan dan Pelaporan
Pelaporan • Prosedur Mgt Keaungan
• Dokumentasi dan Pelaporan • Prosedur Mgt Operasi
• Dokumentasi dan Pelaporan
MRMR •Mgt
Dokumentasi
Keuangan dan Pelaporan •Mgt
Dokumentasi
Operasi dan Pelaporan
Mgt Keuangan Mgt Operasi
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• Right and duties
• Duties & Function GENERAL MEETING OF
• Working mechanism SHAREHOLDERS
• Right & Obligation
• Duties & authorities of corporate
COMMISSARIES organs / sub-organs
• Right & Obligation of office
holders
COMMITTEES
DIRECTORS
CORP INTERNAL
SECRETARY AUDITOR
• Duties & Function
• Policies & Procedures
DIVISION BRANCH
MANAGERS MANAGERS
• Standard Operating
Procedures (SOP)
BRANCHES
HQ STAFFES
STAFFES
Governance Structure
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GCG Code, Board
Manual & Code of Ethics
Corporate
Governance Charters for
Manuals
Supporting Organs
Risk Financial Operations Information Other

Management Management Management Management
Management Policy
Manual Manual Manuals Manuals
Policies Manuals
Risk Policies:
• Financial
•Operasional
Standard Operational risk Financial risk

Operating procedures Procedures
Procedures 29
Good Governance Manuals
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Disclosure and transparency

OECD principles on disclosure and transparency
Timely and accurate disclosure should be made on all

material matters regarding the corporation, including the
financial situation, performance, ownership, and
governance of the company
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Indonesian Capital market regulation on transparency of
information Nr. KEP-86/PM/1996
Obligation to report to the public if there is any material matters
regarding the corporation on:
a. Merger, acquisition, new joint venture, etc.;
b. Stock split or payment of dividend;
c. Extra ordinary income from dividend;
d. Loss or awarding of important contract;
e. Important new product or innovation;
f. Change of management or control;
g. Buy back or payment of important debt or notes
h. Right issue of shares to be sold to market;
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Indonesian Capital market regulation on transparency of
information Nr. KEP-86/PM/1996
Obligation to report to the public if there is any material matters
regarding the corporation on:
i. Purchase or selling assets with loss;
j. Important labour disputes;
k. Legal disputes or legal accusation to the member of BoD or
BoC
l. Strategic offer by another corporation;
m. Change of public accountant to perform company audit;
n. Change of Board of Trustee;
o. Change of fiscal year;
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Indonesian Capital market regulation on Annual Report Nr.
KEP-431/BL/2012
Disclosure on annual Report:
• Financial highlight report
• Report of Board of Commissaries
• Report of Board of Directors
• Company profile
• Management report
• Corporate Governance report
• Corporate Social Responsibility report
• Audited financial report
• Affirmative statement from BoD and BoC on the content of
Annual Report
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Shareholders and stakeholders

OECD principles on shareholders right
• Secure methods of shareowner registration
• Transfer of shares
• Obtaining relevant material information on the company
• Participate and vote at general assemblies
• Elect and remove board members
• Share in company’s profits
Check with Indonesian Corporate Law Nr. 40 Year 2007. What

do you find?
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Key stakeholders
▪ Shareowners
▪ Parties with contractual relationships
o Employees
o Contractors and suppliers
o Providers of capital
o Business partners, regulators, accountants, auditors, etc.
▪ Other parties not having contractual relationship
o Communities
o NGOs
o Analysts, investor associations, pressure groups
o Media and other “reputational” agents, etc
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Stakeholders mapping
LEVEL OF INTEREST
LOW HIGH
LEVEL OF POWER
KEEP INFORMED,
KEEP
HIGH INVOLVED AND
INFORMED
CONTRIBUTING
LOW MINIMAL KEEP

EFFORT INFORMED
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Sekolah Bisnis dan Manajemen Activity – Class group discussion
What is the challenge for family owned company to

implement good corporate governance? Use six principles
of OECD Principles of Corporate Governance below to
evaluate the challenge.
OECD Principles of Corporate Governance:
1. Ensuring the basis for an effective corporate
governance;
2. Right of shareholders and key ownership functions;
3. Equitable treatment of shareholders;
4. Role of stakeholders in corporate governance;
5. Disclosures and transparency;
6. Board responsibilities
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The Board
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Sekolah Bisnis dan Manajemen The Board
Board’s role
“The board’s role is to provide entrepreneurial

leadership of the company within a framework of
prudent and effective controls….”
In Indonesian context, which Board has above mentioned

role?
(See also Board’s role and responsibility from the

Corporate Law session)
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Differences between directing and managing

Directing Managing
• Collective decision-making • Individual decision-making
• Duties and responsibilities to
• Specific to department
shareowners, company
• Directors report regularly to
• Report to board
shareowners
• Leadership vision, strategy • Implement vision, strategy
• Approve, abide by ethics code • Abide by ethics code
• Signoff of financial statements, • Preparation of financial
etc. statements, etc.
• Joint and several liability • Several liabilities
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“Governance” versus “Management”

❑ Governance has more emphasis on directing and
controlling but not managing
❑ Management has more emphasis on planning,
excecution and controlling. In the management, there is
hierarchy of execution and reporting/controlling as
defined by governance
❑ In the context of Indonesian Company Law (UUPT
No.40/2007), Board of Commissaries’ duty is only
governance, but Board of Directors’ duty is governance
and management.
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Effective Board : Composition and Structure
▪ Management Board size criteria;
▪ # of Management Board versus Supervisory Board;
▪ Balanced Boards
▪ Independent Directors and Commissaries;
▪ Director’s skill, experience and attributes;
▪ Commissary’s skill, experience and attributes;
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Effective Board : Composition and Structure
▪ Succession planning, selection and appointment
▪ Supervisory Board’s Committee:
o Audit Committee;
o Governance and Nomination Committee;
o Remuneration Committee
o Risk & Compliance Oversight Committee
o Other Committee
▪ Boards’ remuneration
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Corporate Secretary
Role according to Minister of State Owned Enterprise Nr.
PER — 01 /MBU/2011:
a. As compliance officer especially on the implementation of GCG
and on disclosure & transparency principles;
b. Providing information required by Board of Directors and Board
of Commissaries and also to the public;
c. As corporate liaison officer; and
d. To administer corporate documents and administering Board
meetings and General Meeting of Shareholders.
Notes:
▪ this role is similar Bapepam rule Nr. Kep-63/PM/1996;
▪ Corporate Secretary is not promulgated in Indonesian Corporate Law Nr.
40/2007
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Board practices
▪ Board induction meeting;
▪ Separate Board meeting:
o Preparation;
o Conduct the meeting;
o Document the meeting result;
o Follow-up and in-between meetings
▪ Joint meeting Supervisory and Management Boards;
▪ Administering the meeting documents
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Strategic Leadership
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Sekolah Bisnis dan Manajemen Governance of strategy
Agenda:
▪ The governance of strategy
▪ Evaluating strategy delivery and Directors
evaluation
▪ The governance of risk
▪ Corporate responsibility
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Governance of strategy
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Strategy process
MONITOR AND
EVALUATE
ENVISION
IMPLEMENT
(MANAGEMENT)
ANALYZE
FORMULATE
STRATEGY
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OECD Principles:
Board’s Role In Governing Strategy
“The board should fulfill certain key functions, including:

reviewing and guiding corporate strategy, major plans of
action, risk policy, annual budgets and business plans;
setting performance objectives….”
OECD, Principles of Corporate Governance, 2004
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From purpose to strategy
COMPANY PURPOSE
Why the company exist (mission)?
COMPANY VISION
Vision
Goals
Where the Directors want the
company to be in the future
Objectives
COMPANY STRATEGY
How they are going to take the company from

where it is now to where they want to be
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Understanding The Company’s Chosen Market

▪ The board must understand the nature, risks, behavior,
and competition within its chosen markets
▪ Executive directors typically provide this understanding
▪ At least one non-executive director needs sufficient
understanding to provide oversight and challenge
▪ The chairman oversees the adequacy of non-executive
skills
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Strategic planning process

▪ Environmental scanning, PESTLE, SWOT analysis,
stakeholders analysis;
▪ Strategic level information;
▪ Strategy formulation:
o Ansoff matrix;
o Balanced scorecard;
o BCG Matrix;
o Competitive positioning;
o Porter’s Five Forces, etc.;
▪ Strategic option – organic growth or acquisition?
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Board Role In Governance Of Strategy

What the board contributes to What the board gets from the
the process process
Providing insights Increased Commitment
1. Understanding the outside environment 1. Create deeper understanding

2. Understanding the company’s business 2. Build ownership
3. Devoting enough time to discuss the 3. Improve the quality of decisions
proposed strategy with management
4. Define a more collaborative relationship
and question the assumptions and
forecasts between board and management
4. Clearly setting Key Performance 5. Increase board satisfaction
Indicators 6. Prompt board members to become
5. Setting the reward standards for external company advocates
achievement
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Strategy Committee
Who is on it? What do they do?

1. Selected proactive and 1. Arriving at a vision, acceptable
experienced non-executive to all parties, for presentation
directors to the board
2. Selected executive directors 2. Commission analysis to prove
3. Senior management – on the vision
invitation according to subject 3. Review the strategic plan for
4. External expert advice presentation to the board
(as required) 4. Oversee progress and
recommend adjustments to the
board where appropriate
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Questions Directors Should Ask:

• Strategic direction? Where should the company be in the long-
term?
• Markets and scope? Which markets should it compete in and
what kinds of products and services should it provide?
• Competitive advantage? How can the business perform better
than the competition in those markets?
• Resources? What skills, assets, finance, relationships, technical
competence, facilities are required to compete effectively?
• Environment? What external factors affect the company’s ability
to compete?
• Stakeholders? What are the values and expectations of those
with influence on the company?
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Why do strategies fail?
The problem isn’t lack of strategy. It is
Only 10% of
the lack of ability to successfully
organisations manage the execution of what looks
execute their strategically good on paper.
strategy
Barriers to Strategy Execution
Vision Barrier People Barrier Management Barrier Resource Barrier
Only 5% of the Only 25% of 85% of executive 60% of

workforce managers have teams spend less than organisations
understands the incentives linked one hour per month don’t link budgets
strategy to strategy discussing strategy to strategy
Reference: Robert Kaplan and David Norton - The Balanced Scorecard and The Strategy Focused Organization
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Evaluating strategy delivery

and Directors performance
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Sekolah Bisnis dan Manajemen Evaluating results & directors
OECD Principles
The board should fulfill certain key functions, including:
▪ Monitoring implementation and corporate performance;
and overseeing major capital expenditures, acquisitions
and divestitures…
▪ Selecting, compensating, monitoring, and, when
necessary, replacing key executives and overseeing
succession planning….
▪ Aligning key executive and board remuneration with the
longer term interests of the company and its
shareholders.”
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Key Performance Indicators
Benefits Of Key Performance Indicators
▪ Better corporate governance
▪ More focused board decision-making
▪ Encourages long-term strategic thinking
▪ Fosters improved corporate control
▪ A basis for executive bonus system, aligning pay with
performance
▪ Enhances stakeholder relations, since KPIs can be used by
the board to articulate the company’s vision and strategy
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Key Performance Indicators
Linking KPIs: The Balanced Scorecard
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Strategic Benchmarking
▪ Strategic purpose
▪ Core competencies
▪ Process capability
▪ Product lines
▪ Strategic alliances
▪ Technological capability
▪ Socially responsible performance
▪ Environmental performance
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OECD principles on Executive Performance

evaluation
“The board should fulfil certain key functions, including:

selecting, compensating, monitoring and, when necessary,
replacing key executives and overseeing succession
planning
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CEO Evaluation issue
▪ Performance as measured against current objectives

▪ Progress towards strategic objectives
▪ Business conduct, values, integrity
▪ Match between CEO competencies and company needs,
both current and future
▪ Leadership abilities – how the executive management
team responds to the CEO as a leader and team builder
▪ Physical and psychological fitness
▪ Quality of relationship with the other board member
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Remuneration Policy: NACD Principles
▪ Determined by the board and completely disclosed to

shareowners
▪ Aligned with the long-term interests of shareowners
▪ Used to motivate director behavior
▪ Adequate for directors’ time, effort
▪ Approached on an overall basis, rather than as an array
of separate parts
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Remuneration factors
▪ Company’s financial performance

▪ Achievement of strategic and operational goals
▪ Scope of responsibilities of the executive
▪ Personal skills, other characteristics of the executive
▪ Typical levels of remuneration in the company and the
industry
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Executive Remuneration: Structure
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The governance of risk
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Sekolah Bisnis dan Manajemen The governance of risk
OECD Principles on Corporate Governance
“The Board should fulfill certain key functions including:

Ensuring the integrity of the corporation’s accounting and
financial reporting systems, including the independent
audit, and that appropriate systems of control are in place,
in particular, systems for risk management, financial and
operational control, and compliance with the law and
relevant standards.”
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Risk and performance
“To improve performance, you have to understand

how to better manage risk.”
Sir Nigel Turnbull, UK, 1999.
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Some basic understanding

▪ “Risk is the effect of uncertainty on objective”
▪ “Risk owner is person or entity with accountability and
authority to manage risk”
▪ “Risk management is coordinated activities to direct and
control an organization with regard to risk”
▪ “Risk management policy is statement of the overall
intentions and direction of an organization related to risk
management”
ISO Guide 73:2009
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Benefits of risk management
Operational Performance
▪ Increases the likelihood of achieving business objectives
▪ Uses incidents to highlight the risk environment and helps management develop
performance indicators or risk indicators to enhance business performance and
processes
▪ Facilitates the management of the delivery of risk in key projects and initiatives
Financial
• Protects and enhances value by prioritizing and focusing attention on managing risk
across the company
• Contributes to a better credit rating as agencies increasingly focus upon enterprise risk
management
• Builds investor and stakeholder confidence, and shareowner value
• Reduces insurance premiums through demonstrating a structured risk-management
approach
Decision-making
• Shares risk information across the company, contributing to informed decisions
• Facilitates assurance and transparency of risks at board level
• Enables decisions to be made against risk appetite
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Are we taking the Are we taking the Do we have the

right risks? right amount of right infrastructure
risk? and processes to
 How are the risks we take related
 Are we getting a return that is manage risk?
to our strategies and objectives?
consistent with our overall level  Is our risk management process
 Do we know the significant risks of risk? aligned with our strategic
we are taking? decision-making process and
 Does our organizational culture
 Do the risks we take give us a promote or discourage the right existing performance measures?
competitive advantage? level of risk taking activities?  Is our risk management process
 How are the risks we take related  Do we have a well defined coordinated and consistent across
to activities that create value? organizational risk appetite? the entire enterprise? Does
everyone use the same definition
 Do we recognize that business is  Has our risk appetite been of risk?
about taking risks and do we make quantified in aggregate and per
conscious choices concerning occurrence?  Do we have gaps and/or overlaps
these risks? in our risk coverage?
 Is our actual risk level consistent
with our risk appetite?  Is our risk management process
cost effective?
Source: Various (PwC, KPMG, ERM Academy) 73

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Board’s Role:
▪ Define and endorse risk management policy:
o Assign accountabilities and responsibilities for managing risks
(risk governance);
o Commitment to provide resources;
o Commitment to review and improve the effectiveness of risk
management framework;
▪ Ensure that organization’s culture and risk management
policy are aligned;
▪ Determine risk management performance indicators that
align with performance indicators of the organization;
▪ Align risk management objectives with the objectives
and strategies of the organization
74
SBM – ITB
Risk governance
Risk governance structure (an example)
BOARD OF Risk Oversight

COMMISSARIES Committee
Oversight
BOARD OF RISK COMMITTEE

DIRECTORS (Across function)
INTERNAL
AUDITOR
OPERATION FINANCIAL HUKUM & PEOPLE & GEN. RISK

MANAGEMENT MANAGEMENT KEPATUHAN AFFAIRS MANAGEMENT
MANAGEMENT UNIT
75
SBM – ITB
Risk governance
Assigning accountability and responsibility (an example)
Director RISK OWNER → ACCOUNTABLE
Division
Division
Manager
Division
Manager RISK OWNER → ACCOUNTABLE
Manager
Department
Department
Manager RISK OWNER → RESPONSIBLE
Department
Manager
Manager
Section
Section
Manager CONTROL OWNER → RESPONSIBLE
Section
Manager
Manager
Staff
Staff CONTROL OWNER → RESPONSIBLE
Staff
76
SBM – ITB
Risk governance
▪ Clear define role and responsibilities
A key component of effective risk governance is to establish
clear lines of accountability, authority and competence in
managing risk of every positions. Roles and responsibility of :
▪ Board of Directors;
▪ Board of Commissaries;
▪ Audit Committee;
▪ Risk Oversight Committee;
▪ Risk Management Unit;
▪ Head of Business Units
▪ Staffs ;
▪ Contractors, vendors, etc.
77
SBM – ITB
Risk governance
▪ Responsibilities and competencies in risk management
Based on the established clear lines of accountability and authority
there is a need to draw competencies requirement related to
managing risk based on ISO 31000 for each position
Examples of competencies requirement
POSITION REPONSIBILITIES COMPETENCIES REQUIREMENT
Provide direction and oversight for ▪ ISO 31000 Fundamental;
Boards risk management across the ▪ Risk Governance;
organization
▪ ISO 31000 Fundamental;
Providing assurance the adequacy
Audit ▪ Auditing risk management
and effectiveness of risk
Committee system
management system
▪ Risk based Internal Audit (RBIA)
▪ ISO 31000 Fundamental;
Line manager Design, implementing and monitoring
▪ Risk assessment techniques
– Risk owner risk treatments / controls
78
SBM – ITB
Risk governance
▪ Risk management accountability
Source: IIA Position Paper, (2013), “The three lines of defense in effective risk management and control” 79
SBM – ITB
Risk governance
▪ Risk review and reporting system
Strategic / Critical BoC Risk/ Audit

risk issues & BoD Committee
Significant / key operational BoD & Exec Risk Mgt

and strategic risk information
Senior Management Committee
Operational and strategic

Op Risk Mgt
risk information at Business Units Committee
Business level
Volume of risk information

80
SBM – ITB
Risk management system ISO 31000

1. Create values and protects value
2. Is an Integral part or Mandate &
commitmen
organizational processes t
3. Part of decision making
4. Explicitly addresses uncertainty Establishing the
context
5. Is systematic, structured and Design of
timely framework
6. Is based on the best available for Risk
Risk assessment
assessment
managing
information risk
Communication &
Risk identification
7. Is tailored
Monitoring
& Review
Consultation
8. Takes human and cultural factors Continual Implementin
improvemen g risk Risk analysis
into account
t of the managemen
9. Is transparent and inclusive framework t
10.Is dynamic, iterative and Risk evaluation
responsive to change Monitoring

11.Facilities continual improvement and review
and enhancement of the of the
Risk treatment
framework
organization
RISK MANAGEMENT PRINCIPLES RISK MANAGEMENT FRAMEWORK RISK MANAGEMENT PROCESS
81
SBM – ITB
❑Risk management principles
“. . . Risk management
principles provides the
foundation and
describes the qualities
of effective risk
management in an
organization. . . .”
Dorothy Gjerdrum
Chair of US ISO 31000 TAG
2011
82
SBM – ITB
❑Risk management
Mandate &
BoD
framework
commitment BoC
“. . . Risk management
framework manages the
BoD
Design of
framework for
overall process and its
managing risk full integration into the
organization ….”
Continual BoD Implementing BoD
improvement
risk
of the BoC management
framework
Dorothy Gjerdrum
Monitoring
and review of
BoD
2011
the framework BoC
83
SBM – ITB
❑ Risk management process
“. . The process for
managing risk
focuses on individual
or group of risks,
their identification,
analysis, evaluation
and treatment”
Dorothy Gjerdrum
2011
84
SBM – ITB
Establishing the
context
Risk assessment
Com munication &
Risk identification
Consultation
RISK MANAGEMENT
Monitoring
& Review
PROCESS
Risk analysis
Risk evaluation
Risk treatment
85
SBM – ITB
Corporate responsibility
86
SBM – ITB
Sekolah Bisnis dan Manajemen Corporate responsibility
Orientation: Corporate Responsibility

• “Corporate responsibility – the way a company deals with
the economic, social and environmental impact of its
practices ”
Financial Times
• Other terms:
– Corporate social responsibility
– Sustainable growth
– Social responsibility
– Corporate citizenship
– People, planet and profit (3P)
87
SBM – ITB
CR Definition –World Bank
“Corporate responsibility is the commitment of

businesses to behave ethically and to contribute to
sustainable economic development by working
with all relevant stakeholders to improve their lives
in ways that are good for business, the sustainable
development agenda and society at large.”
World Bank
88
SBM – ITB
OECD Principles of Corporate Governance
• OECD CG Principle IV: “The corporate governance framework should
recognise the rights of stakeholders established by law or through
mutual agreements and encourage active co-operation between
corporations and stakeholders in creating wealth, jobs, and the
sustainability of financially sound enterprises.”
• OECD CG Principle VI c: “The board should apply high ethical

standards. It should take into account the interests of stakeholders.”
• OECD MNE Guidelines: “They contain voluntary principles and

standards for responsible business conduct… they aim to promote the
positive contributions multinational enterprises can make to economic,
environmental and social progress.”
OECD Policy Brief, June 2003
89
SBM – ITB
Balancing The Triple Bottom Line
❑ Balancing the Triple Bottom Line is about considering three

elements when making business decisions:
• Economically viable
• Socially responsible
• Environmentally sound
❑ Companies manage business while demonstrating

commitment to driving sustainable development – locally and
globally
90
SBM – ITB
Example: Triple Bottom Line–Novo Nordisk

“We recognize that our
activities impact people,
communities and the
environment and that
they may have
consequences for future
generations. Through our
commitment to the Triple
Bottom Line (financial,
social and environmental
responsibility) we strive to
maximize positive
impacts and minimize the
negative ones.”
91
SBM – ITB
Board’s Role in CR Leadership Planning
• Define CR strategy – proactive or reactive

• Exert leadership – mobilize company
• Determine regulatory/voluntary responses
• Set strategic direction
• Establish codes of conduct
• Guide management on CR communications
– Internal and external
• Ensure appropriate structures for CR
– Board committee? Staff? Resources?
• Undertake, monitor, report on CR activities
92
SBM – ITB
Multiple Standards, Approaches

Before 2012
• UN Global Compact
• UN Finance Initiative
• IFC Equator Principles
• EMS/ISO 14000
• Global Reporting Initiative
• Enhanced Business Reporting Initiative
• Institutional investors’ specific requirements
• Indices (Dow Jones Sustainability Index, FTSE 4 Good)
• Activists – ethical, militant, e-activists
• Media: selection of “most admired companies,” etc.
After 2012
• ISO 26000
93
SBM – ITB
Financial Stewardship &

Accountability
94
SBM – ITB
Financial Oversight
95
SBM – ITB
Sekolah Bisnis dan Manajemen Financial Oversight
Agency and Stewardship
96
SBM – ITB
97
Financial Stewardship
A system of management accountability to ensure that

managers operate in the best interests of the company and
the shareowners
• Arises because shareowners contribute capital to the
company to make a profit on their investment
• Shareowners have lost control of their capital to
managers, who may operate in their own interests
• Financial oversight provides accountability to
shareowners
97
SBM – ITB
98
Accountability
• Involves the wider impact of company activities on the

community
• For financial, environmental, and societal responsibilities
• For quality, efficiency, and effectiveness
• To multiple regulators on multiple issues (e.g., tax,
banking, insurance, statistics, privacy, environment, etc.)
98
SBM – ITB
99
OECD Principles – Disclosure and Transparency
“The corporate governance framework should ensure

that timely and accurate disclosure is made on all
governance of the company”.
OECD – Principles of Corporate Governance
99
SBM – ITB
100
OECD Principles – Board Responsibilities
“Ensuring the integrity of the corporation’s accounting and

financial reporting systems, including the independent
audit, and that appropriate systems of control are in
place, in particular, systems for risk management,
financial and operational control, and compliance with
the law and relevant standards”
OECD – Principles of Corporate Governance
100
SBM – ITB
Board Role in financial stewardship
101
SBM – ITB
Board Role in financial oversight
• Duty of care (act honestly, in good faith, and for a proper

purpose)
• Maintain proper accounting records
• Disclosure of company’s financial position and
performance
• Establishing, monitoring proper internal controls
• Ensuring proper external controls and audit
• Skills, knowledge required by directors to fulfil
these roles
102
SBM – ITB
Board and accounting function
• Board interface with CFO and accounting function

• Role of CFO – more than accounting and finance,
includes strategy, risk, treasury, and investor relations
• Board and the accounting function
– Input
– Access
– Policies and controls
– People – skills and capacities
• Issues and questions to ask
103
SBM – ITB
Investor perspective
• Information required to understand the company’s

position
• Accounting policy choices by management
• Measurement issues – assumptions and valuation
methods; uncertainty in measurements
• Assets and liabilities not reported in financial statements
• Trends, forecasts, offsets in financial statements
• Company risk exposures
• Non–financial drivers in company operations
• Seven habits
104
SBM – ITB
Financial information – Users, Their interest, Needs
• Who are the users of financial information?

• What are their specific interests in it?
• What are their needs?
105
SBM – ITB
Financial information : Users, Interests

Employees Ability to pay salaries, wages, and benefits
Suppliers Capacity to pay a debt for goods or services

provided to the entity
Creditors Future cash flows, the security of debts
Governments, agencies, Efficient allocation of economic resources,

and regulators regulating, taxation, national statistics
Customers Continued supply of goods or services
Equity investors Cash flows and share price
The public Variable interests
106
SBM – ITB
The Accounting environment

• IFRS
• GAAP
• Accounting Standards
– Trans–national differences
– Intra–national differences
– Local applicable accounting standards
• Accounting assumptions
– Accrual basis
– Going concern basis
• Qualities of financial information
– Relevance
– Reliability
– Others qualities contributing to relevance and reliability
107
SBM – ITB
Company accounting environment
108
SBM – ITB
Financial Statements - Components
Income statement Income – expenses = Net profit
Balance sheet Assets – liabilities = equity
Cash flow statement Cash in – cash out + opening cash

= cash
SOCIE Change in net assets over the
period (all gains and losses)
Notes Watch the notes!! Read carefully.
109
SBM – ITB
110
Accounting policies
“Critical accounting policies are those that are most

important to the portrayal of our financial condition,
results of operations and cash flow, and require
management to make difficult, subjective or complex
judgements and estimates about matters that are
inherently uncertain. Management bases its estimates on
historical experience and other assumptions that it
believes are reasonable.”
Source: Cadbury Schweppes Annual
Report and Accounts, 2006
110
SBM – ITB
111
Ratio analysis
• Used to understand financial statements, their contents

and relationships
• Considered within circumstances affecting the company,
industry, sector, economic environment
• Options include comparing ratios
– Within the company itself over time
– With competitors
– Within the industry and sector to establish trends and
benchmarks
• Note: Ratio analyses are limited if accounting methods
change
111
SBM – ITB
Ratio analysis
• Liquidity
– Current ratio
– Quick ratio
• Profitability
– Gross profit margin
– Net profit margin
– Return on assets
• Performance
– Gearing ratio
– Average collection period, debtors
– Stock turnover
– Overheads as a percentage of turnover
112
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Consequences of inadequate financial information
• Delisting or suspension of a listed entity

– Sanyo example
• Restatement of financial information
• Shareowners seeking a return of their investment and/or
investor reluctance
• Difficulty in gaining funding
• Inappropriate board decisions
• Legal proceedings against directors
113
SBM – ITB
Reporting
114
SBM – ITB
Sekolah Bisnis dan Manajemen Reporting
OECD Principles of Corporate governance
“The board should fulfil certain key functions

including:…ensuring the integrity of the corporation’s
accounting and financial reporting systems.”
"The corporate governance framework should ensure

that timely and accurate disclosure is made on all
governance of the company."
115
SBM – ITB
Why disclose?
▪ Helps investors make informed decisions to buy or sell a

company’s shares
▪ Holds company accountable through greater
transparency
▪ Builds trust, confidence
▪ Required by laws, regulations
▪ Stakeholder demands
116
SBM – ITB
Driver for greater transparency
▪ Increased access to external financing

▪ A reduction in capital costs
▪ Higher firm valuation and share performance
▪ Reduced risk of corporate crises and scandals
117
SBM – ITB
Quarterly financial report : For and Against

For:
▪ Benefits all investors
▪ Imposes financial discipline
Against:
▪ Financial information may already be disclosed through half-
yearly and annual reports, stock exchange announcements
▪ Analysis, preparation costs
▪ Distracts companies from properly managing their businesses
▪ Controlling shareholders bear the cost for providing
information to minority shareholders
▪ Encourages short-term focus on immediate results by
investors, management
118
SBM – ITB
Narrative report: EU Business Review
▪ Fair review of the company’s business

▪ Description of the company’s principal risks, uncertainties
▪ Balanced, comprehensive, timely analysis of the
company’s development and performance during the
financial year and year-end position. Includes:
• Analysis using key financial performance indicators (KPIs)
• Information relating to environmental, employee matters
119
SBM – ITB
Narrative report: US
“Management’s Discussion and Analysis” normally outlines

the big picture and the likelihood of change:
▪ Application of critical accounting policies
▪ Operations (e.g., money-making methods, results)
▪ Liquidity
▪ Capital resources
▪ Off-balance sheet arrangements (e.g., unconsolidated)
▪ Potential for changes (“reasonable likelihood”)
120
SBM – ITB
Enforcement powers: Company
Regulators may:
• Withdraw a company’s license to operate
• Censure companies through public “name and shame”
statements;
• Impose financial penalties
• Seek court injunctions
• Apply to court to freeze company assets
• Prosecute companies who undertake activities without
authorization
121
SBM – ITB Reporting
Sekolah Bisnis dan Manajemen
Enforcement powers: Individual
Regulators may:
• Prohibit an individual director from operating in a sector
(particularly applies to financial services)
• Prevent an individual director from undertaking specific
regulated activities
• Censure individual directors through public “name and
shame” statements
• Impose financial penalties on the director
• Seek court injunctions against the director
• Prosecute directors who undertake activities without
authorization
122
SBM – ITB
Benefits of good communications
• Builds trust, goodwill with shareowners, potential

investors, stakeholders
• Transparency reduces risk of fraud, theft, deceit, etc.
• Facilitates the work of investment analysts and thereby
raises the company profile by gaining exposure in
investment banks' and stockbrokers' reports
123
SBM – ITB
Annual Report
• Cover page
• Overview
• Chairman’s report
• Information about the company
• Management’s Discussion and Analysis
• Market share, sales, and marketing
• Securities and equity
• Corporate governance structures, principles
• Environmental, social, economic sustainability (e.g., UN
Compact, GRI, Equator Principles)
• Financial statements, notes, comments
(see also Bapepam’s rule on Annual Report Nr. KEP-431/BL/2012)
124
SBM – ITB
The Website
Benefits
▪ Fair, timely disclosure
▪ Simple
▪ Cheap
▪ Instant
▪ Globally accessible
Caution
▪ User must check to see if new information is available
▪ Accuracy and legal status of disclosure on the Internet may be
uncertain in many jurisdictions since much of the information
is not audited
125
SBM – ITB
Investor relation
The board needs shareowners’ support at all times but
particularly when:
▪ It wishes to increase its shares
▪ Company is producing disappointing short-term results
▪ Management performance is disappointing
▪ There is a need to change the business’s strategic direction
▪ There is concern about the company’s governance
▪ Defensive measures need to be taken during an aggressive,
unwanted takeover
▪ A crisis might otherwise create a run of confidence following
a change of chairman, CEO or other key executive
126
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Investor relation department objectives
▪ Explain the company’s vision, strategy to the investing

community
▪ Build sell-side community interest and financial analyst
following
▪ Manage expectations of the company’s share price,
earnings outlook
▪ Reduce share price volatility by optimizing
communications with investors, analysts
127
SBM – ITB
Investor relation department role
• Anticipating market reaction to corporate initiatives
• Disclosing statutory and non-statutory information and
associated issues
• Avoiding selective disclosure in which some investors receive
market-moving information before others
• Organizing event-driven communications (e.g., mergers,
acquisitions, executive departures, financial statements)
• Using public and private channels of communication
• Managing and minimizing investor relations crises, false
information, rumors
• Adhering to investor relations best practices (e.g., meeting
investors regularly, holding “analyst days,” group investor
meetings with management)
128
SBM – ITB
Corporate Finance
129
SBM – ITB
Sekolah Bisnis dan Manajemen Corporate Finance
OECD Principles of corporate Governance
“The board should fulfil certain key functions

including:… overseeing major capital
expenditures, acquisitions and divestitures.”
130
SBM – ITB
Typical finance questions:
▪ Can the strategy and plan be funded given the present

and future resources that are and will be available to our
company?
▪ How much of the company’s finance should be in debt?
In equity?
▪ Will the plan provide the increase in shareowner value
that the owners can reasonably expect?
▪ How much of the profit should be paid in dividends?
▪ Does the company need to issue new equity?
131
SBM – ITB
The need for funds : Internal vs External
• Start-up
• Rapid expansion
• High growth
• Mature growth
• Decline
132
SBM – ITB
Debt features
• No ownership rights associated with controlling company

• No rights to company’s future profits
• Lender may have the right to repossess assets
• Interest must be paid no matter what the company’s
performance is
• Company must ensure that it has sufficient cash flow to
pay interest and repay the loan
• Interest paid on the loan is normally tax deductible
• Too much debt can impair credit rating
133
SBM – ITB
Equity features
• The shareowner has ownership rights

associated with controlling the company.
• Dividends are paid at the company’s discretion
• Dividend payments are not normally tax
deductible
• Company must comply with reporting
requirements to shareowners
134
SBM – ITB
Major transaction
• Significant asset purchases

• Significant asset sales
• Large loans taken out by a company
• A range of individual separate transactions
conducted towards the same end goal
135
SBM – ITB
Dividend policy
• Paying the shareholders a dividend

• Retaining the profit and investing in additional
projects
• Buying back shares
136
SBM – ITB
Merger, Acquisitin, divestment : Valuation
The “net asset” basis

• Focuses on the value of the assets owned by the
company.
An “earnings” based valuation

• Concentrates on the net present value of income and
earnings generated by a particular company – historical
and projected (the potential to earn income in the future)
137
SBM – ITB
The Control Environment
138
SBM – ITB
Sekolah Bisnis dan Manajemen The Control Environment
The control environment
The control environment normally encompasses

areas of business related to risk and the
management of those risks through:
▪ internal controls
▪ internal audit functions
▪ external audit functions
▪ laws and regulations
139
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140
OECD Principles – Board responsibilities
Principle VI: The Responsibilities of the Board

“The corporate governance framework should
ensure the strategic guidance of the company,
the effective monitoring of management by the
board, and the board’s accountability to the
company and the shareholders.”
OECD Principles of Corporate Governance (2004)
140
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141
Board role – Internal control
In maintaining a sound system of internal control, the board

should:
• Set appropriate policies on internal control
• Seek regular assurance to satisfy itself that the system is
operating effectively
• Ensure that the system of internal control is effective in
managing risks in the way that it has approved.
OECD Corporate Governance Principles (2004)
141
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142
Internal control
Internal control is broadly defined as a process, effected by

an entity's board of directors, management and other
personnel, designed to provide reasonable assurance
regarding the achievement of objectives in the following
categories:
▪ Effectiveness and efficiency of operations
▪ Reliability of financial reporting
▪ Compliance with applicable laws and regulations
COSO Framework definition. The COSO Report
142
SBM – ITB
Why internal control?
Internal control processes:

• Detect errors
• Prevent mistakes
• Identify fraud
• Ensure the reliability of financial reports
143
SBM – ITB
Internal control - examples
• Authorization policies
– Board review, approve annual budget
– Authority to obligate funds
– Transactions authorized
• Documentation of revenues and spending
– Written agreements with vendors, contractors
– Detailed invoices
– Transactions recorded
• Security measures to safeguard assets
– Control of access to funds, property
– Prevention and early detection of fraud
144
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145
Internal control – How to improve?
• Appoint managers with in-depth knowledge of financial

and operational issues
• Distribute responsibilities
• Ensure that responsibilities are well-understood
• Document policies, procedures, responsibilities
• Provide adequate supervision
• Monitor efficiency
• Provide adequate training
• Improve information and communication channels
• Other?
145
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146
Board role – Audit Committee
• Identifies audit committee members with the expertise to

provide efficient, effective oversight
• Mandates the duties of the audit committee in a charter
• Provides appropriate reports, financial statements, and
recommendations to the audit committee
• Supports the audit committee in the tone and
requirements it sets for the company
146
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147
Audit committee Role – Internal Organization of
Securities Commission
• Ensuring the integrity of the company’s financial statements

• Meeting on a regular basis with the internal and the external
auditor to discuss the financial information
• Ensuring the effectiveness of the internal control and
risk-management policy
• Reporting regularly to the board on all relevant questions
under its responsibility, including making recommendations on
the appointment of the external auditor, its remuneration, its
contract term
• Monitoring related-party transactions
147
SBM – ITB
148
Audit Committee - Organization
• Charter
– Delineate board and audit committee responsibilities
– Cover important areas such as structure, process,
membership
– Incorporate new legal and exchange requirements
– Assert the committee's authority to hire and fire
internal auditors and external advisors to the audit
committee
– Be regularly refreshed, usually annually
– Be disclosed to shareowners to promote transparency
148
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149
• Composition
– How many members should there be on the audit
committee?
– Should all/some members be non-executive?
– Should all/some members be independent?
– Should all/some members have financial experience?
If so, how should it be defined?
– Should the chairman be an audit committee member?
149
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150
• Meeting Frequency
– not an expected set frequency – no “one size fits all”
– should be sufficient to deal with the issues that arise
in the company, given the size and complexity of the
organization and its operations
– “normal” schedule of audit committee meetings that
may be expanded when critical issues arise
– frequency of audit committee meetings is expected to
vary according to the stage of development of
oversight activities in the company
– three to four meetings per year may be the norm if
there are no additional critical issues to deal with
150
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151
Audit Committee - Role
• To monitor the integrity of the company’s financial

statements
• To review the company's internal control and risk-
management system
• To monitor and review the effectiveness of the
company's internal audit function
• To make recommendations to the board regarding the
appointment of the external auditor, and to approve the
remuneration and terms of engagement of the external
auditor
151
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152
Audit committee - Role
• To review and monitor the external auditor’s

independence and objectivity, and the effectiveness of
the audit process
• To develop and implement policy on external auditor’s
engagement to supply non-audit services
• To report to the board, identifying any matters that need
action or improvement, and making recommendations
152
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153
Audit Committee Responsibilities – Internal Audit
Accuracy of financial reporting

– Compliance with laws, regulations
– Effective, efficient operations
Committee for sponsoring organisations of the

– Treadway Commission (COSO)
– Internal Control – Integrated Framework (1992)
– Reviewing the internal control system
153
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154
Internal audit
“Internal auditing is an independent, objective assurance

and consulting activity designed to add value and
improve an organization's operations. It helps an
organization accomplish its objectives by bringing a
systematic, disciplined approach to evaluate and
improve the effectiveness of risk management, control,
and governance processes.”
Institute of Internal Auditors (US)
154
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155
Audit Committee – Detail duties
• Financial supervision
– Monitor the company’s financial position and its
financial statements’ integrity
– Assess the appropriateness of accounting standards
– Monitor any formal announcements relating to the
company’s financial performance, including the
annual financial statements, the annual report, other
reports, and interim reports and statements
155
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156
• Internal audit and control

– Evaluate the adequacy and appropriateness of
internal control, internal audit, risk management
– Review internal audit plans, reports
– Safeguard the company’s assets by understanding
the company’s risk environment and determine how to
deal with those risks
– Evaluate compliance with laws, regulations
156
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157
• Auditor selection and monitoring

– Prepare the decision to appoint the external auditor
– Maintain contacts with the external auditor, examine the auditor’s
reports
– Recommend the auditor to the board for shareowner approval
– Appoint, re-appoint, remove the external auditor
– Review, monitor the external auditor’s independence
– Evaluate the non-audit services supplied by the external auditor
– Develop, implement policy on engaging the external auditor to
supply non-audit services
– Maintain communications on such matters between the board,
management, the independent auditors, the internal auditors
157
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158
• Compliance
– Understand the ramifications of changes to the legal and
regulatory framework on the company’s controls
– Ensure compliance with internal policies, procedures
– Monitor operation of the company’s whistleblower
arrangement
• Risk management
– Ensure that all business risks are identified, evaluated,
suitably managed
– Decide on the company’s risk appetite
– For banks, analyze the current and future capital
requirements in relation to its strategic objectives
158
SBM – ITB
External Audit
• An examination by an independent professional

auditor of the company’s financial statements
• The independent auditor presents an opinion on
whether a company’s financial statements are
accurate, complete, fairly presented, and free of
misstatements
159
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160
Audit Committee Role – External Audit
• Select a professional auditor.
• Ensure the auditor’s independence, qualifications, expertise,
resources, effectiveness.
• Negotiate the audit firm’s remuneration
• Review internal quality control procedures and refer
impairments or perceived impairments to the audit firm’s
independent judgment
• Have regular contact with the auditor:
– Before the audit to determine the audit’s scope and plan
– During the audit, to consider significant issues
– After the audit, to discuss auditor recommendations and to
work with the auditor to ensure constant improvement in
controls, notably through the audit committee
160
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161
Audit Committee – Follow up to External Audit
• Evaluate the quality of the auditor’s work

• Invite the auditor to the general assembly
• Adopt a constructive approach to mistakes or
issues identified by the auditor
• Disclose the audit report, notably in the annual
report and on the Website
• Ensure that the auditor issues a management
letter
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Benefits of Audit Committee
• Strengthens corporate governance
• Enables a small group of board members to focus
on major topics
• Board members improve their knowledge of financial
reporting, audit-related issues
• Provides an opportunity, through meetings and
discussions,
for closer interface with senior company executives and
the external auditor
• Allows external auditor to raise issues with the audit
committee in a relatively structured environment
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Whistleblowing
• Whistleblowing is the act of reporting misconduct to

managers, executives, or other authorities with the
power to take corrective action.
Examples of misconduct:
– Violations of regulations, laws, or rules
– Behavior that threatens the public welfare
– Other examples?
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Whistleblowing – Questions, Best practices
• Does the company have whistleblowing procedures?

• Are employees aware of them?
• Can employees raise concerns without risk of censure?
• Does the company act promptly on concerns?
• Are genuine whistleblowers protected?
• Is there a senior manager responsible?
• Do all managers understand the policy and accept the
principle?
• Are all reports advised to the audit committee?
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THANK YOU
165

GCG and Board Leadership

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GCG and Board Leadership

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SBM – ITB

School of Business and Management

Corporate Governance and

• Providing information about corporate

Notes: This lecture material is developed based on material on

Corporate Governance context

GCG Regulatory driven

Source: Harvard Business School (2005)

Essence of Corporate Governance

1997 Good Corporate Governance (GCG) clause in Letter of Intent (LoI)

Establishment of National Committee on Corporate

1.Establishment of NGOs, who are concern for GCG

1.Indonesian Code on GCG was published by NCGCG

1. SOE Ministerial Decree No.117/2002 on Implementation of GCG in

1. Bapepam (Capital Market Authority) issued the rule on periodical

1. NCCG declared its “Destination Statement” to put

1. Indonesian Central Bank issued Act (PBI) on GCG

Parliament passed new Company Law and new Investment

2008 Revision on Corporate Governance Code for Insurance

1. NCCG published GCG code for Syariah Banking

1. NCCG published Guideline on Enterprise Risk Management

2015 1. NCCG revised Code of Corporate Givernance

Strong Corporate Governance Attracts Investors

• Capital will flow elsewhere if:

What is Corporate governance?

Corporate governance is integrating law and ethics

What is “governance” in daily corporate life?

Corporate governance means leadership ….

Agency and stewardship

Five elements of Corporate Governance

The five key elements of

environment and processes

disclosure and transparency

Strong commitment to corporate governance reforms

Elements of good governance ………

OECD Principles of Corporate Governance

Corporate Governance system

Prof. Bob Tricker, 1984

A company’s corporate governance system

Peraturan perundangan dan turunannya:

Anggaran Dasar Perusahaan

Hierarchy of rule and

Manual Manajemen Risiko: Manual Manajemen Keuangan: Manual Manajemen Operasi:

Risk Financial Operations Information Other

Standard Operational risk Financial risk

Disclosure and transparency

Timely and accurate disclosure should be made on all

Disclosure and transparency

Shareholders and stakeholders

Check with Indonesian Corporate Law Nr. 40 Year 2007. What

Shareholders and stakeholders

Shareholders and stakeholders

LOW MINIMAL KEEP

What is the challenge for family owned company to

“The board’s role is to provide entrepreneurial

In Indonesian context, which Board has above mentioned

(See also Board’s role and responsibility from the

Differences between directing and managing

“Governance” versus “Management”

“The board should fulfill certain key functions, including:

OECD, Principles of Corporate Governance, 2004

Why the company exist (mission)?

How they are going to take the company from