Navigating Boardroom Challenges: A Guide on Corporate Governance

1. Comments on Ten Boardroom Challenges: A Boardroom Guide to The OECD Priciples on Corporate Governance Tony Silitonga Indonesian Institute for Corporate Directorship (IICD)

2. Ten Boardroom Challenges • Board Mandate • Management Oversight– Selecting, Supervising, Evaluating, Compensating, and Replacing Management • Corporate Strategy & Risk– Challenging management assumptions about opportunities & Risks; consensus about strategic direction; monitoring achievement or strategic goals • Disclosure– Overseeing audit processes, accounting policies and disclosure requirements • Corporate Values– Establishing an appropriate “tone at the top”. • An Effective Governance System– Developing and implementing a governance system that makes efficient and effective use of limited resources. • Independent-Minded Board– Ensuring board objectivity. • Fiduciary Governance– Understanding and meeting the expectations of shareholders and regulators. • Informing the Board– Identifying the board’s information needs and ensuring the board has access to that information. • Responding to Crises– Responding quickly and responsibly to corporate problems.

3. Background Why Ten Boardroom Challenges ? • Half of the Fortune 500 companies in 1987 are not Fortune 500 companies today. Many of these companies have FAILED AND CLOSED THEIR DOORS FOREVER. Reasons cited are numerous (“Failures of Vision”, “Identity Crisis”, “Anybody Out There”, “The Glue Sticks, and Sticks”, “Enemies Within”). • Escalating challenge of CEO survival (Within 2 years, 57% of the largest 367 companies in USA REMOVED their CEOs ) • There are CHANGES in nature of the business, investment, and investors (3 most obvious ones: Constituent Demands are Greater, Expectations are Higher, Competition is Tougher) To influence the Boardroom guidelines and Best Practices that build on OECD Principles

4. The Importance of Alignment OperationalExcellence NOT AVAILABLE / NOT CLEAR

5. NEW ENTRANTS RIVALRY SUPPLIER BUYER SUBSTITUTE Framework for Corporate Performance GCG Principles ECONOMIC Based on OECD International Standard Code on GCG Guidelines POLITICAL LEGAL Industry Regulation HR FIN OPM MKTG VMO ision ission bjectives $ VALUE CHAIN TECHNOLOGY NATURAL RESOURCES SOCIAL

6. GCG Principles on Framework for Corporate Performance GCG Principles Based on OECD International Standard Code on GCG Guidelines The rights of shareholders and key ownership functions The equitable treatment of shareholders The role of stakeholders in corporate governance Disclosure and transparency Board responsibilities

7. McKINSEY’S INTERNATIONAL INSTITUTIONAL INVESTORS’ SURVEY CONFIRMS IMPORTANCE OF GOOD CORPORATE GOVERNANCE IN INDONESIA What The Investors' Need ? • “In evaluating Asian companies for potential investment, how important is the quality of board practices relative to financial issues?” Source: McKinsey survey of 250 institutional investors with aggregate assets under management of USD3.2 trillion

8. IICD CG Scorecard Research.. Does CG Work? (Indonesian Practices) High Low Commitment/ Over Performers High Commitment Tobin’s Q 36.07% Expected Distribution 49.18% 1.00 Low Commitment High Commitment/ Under Performers 13.11% 1.64% Low Low 67.37 High Corporate Governance Scorecard Tobin’s Q: Lowest = 0.73; Highest = 7.25 CG Score: Lowest = 52.04; Highest = 82.83

9. CG Score CG Score IICD CG Scorecard Research.. CG Scores in Highly Supervised Companies High FAC 77.78% FAC 22.22% Tobin’s Q Banks 11.11% Banks 88.89% SOEs 100% 1.00 Low 67.37 Low High Note: SOEs = 12; Banks = 9; and Foreign Affiliated Companies (FAC) = 18; Multiple response

10. What are The Real Boardroom Challenges ? Four (4) interrelated CORE issues C ompetency I M otivation ntegrity Independency C ompensation

11. TRUTHSabout FRAUD • Fraud is recognised as a significant threat facing businesses, big or small, all over the world. • Some frauds arise because of too much trust being placed on one individual with no effective segregation of duties. • Employees can commit fraud at any time and for whatever reason. ACRONYM FOR FRAUD :F ALSE R EALITIES A PPEARING U NDER D ECEPTION Tan Chen Leong CFE IICD-Marcus Evans Forum for Directors 16-17 Jan. 2006 – Mulia Hotel, Jakarta

12. How Big is FRAUD RISK ??? Losses from fraud are likely to be grossly misleading because only a fraction of fraud is reported. Statistically: • One out of every four persons will steal whenever they can. • Two out of four persons will steal when they think they can get away with it. • In total, 75% of all persons are potential fraud perpetrators. Tan Chen Leong CFE IICD-Marcus Evans Forum for Directors 16-17 Jan. 2006 – Mulia Hotel, Jakarta

13. How to To face the challenges ? Board needs the right people, the right culture, the right issues, the right information, the right process and the right follow-through

14. ForThe Board to Consider !!!

15. Ten Boardroom Challenges • An Effective Governance System– Developing and implementing a governance system that makes efficient and effective use of limited resources. • Board Mandate • Corporate Values– Establishing an appropriate “tone at the top”. • Corporate Strategy & Risk– Challenging management assumptions about opportunities & Risks; consensus about strategic direction; monitoring achievement or strategic goals • Disclosure– Overseeing audit processes, accounting policies and disclosure requirements • Fiduciary Governance– Understanding and meeting the expectations of shareholders and regulators. • mAnagement Oversight– Selecting, Supervising, Evaluating, Compensating, and Replacing Management • Independent-Minded Board– Ensuring board objectivity. • Informing the Board– Identifying the board’s information needs and ensuring the board has access to that information. • Responding to Crises– Responding quickly and responsibly to corporate problems.

16. Ten Boardroom Challenges INPUTs • Implementation • Time Concern (2 X)? • Interdependent but Accountable • Advanced Training • Maximum Board Seat • Insurance

17. Thanks ... Are You a Competent Board Member ? The Publicly Listed Companies Organization Forum Nikko Hotel - 29 March 2006 - Jakarta