Principles of GCG and the OECD 2023 Standards: Implementation and Relevance for Indonesian Companies

In recent years, the discourse on GCG (Good Corporate Governance) Principles is no longer limited to public companies.

Private companies, family business groups, and entities preparing to seek external funding are increasingly recognizing that corporate governance is not just a matter of regulatory formality.

In practice within Indonesian companies, corporate governance has become a determining factor in managing legal risks, preventing conflicts of interest, maintaining shareholder trust, and ensuring business sustainability.

Failure to implement GCG principles often leads to disputes among shareholders, lawsuits against Directors and Commissioners, regulatory investigations, and reputational damage that is difficult to recover.

Conversely, consistent implementation strengthens the company’s position in the eyes of investors, creditors, and the market.

Therefore, understanding GCG principles strategically, not just normatively, has become a necessity for the highest decision-makers in the company.

GCG Principles (TARIF)

GCG principles in Indonesia refer to the TARIF concept: Transparency, Accountability, Responsibility, Independence, and Fairness.

These TARIF principles form the foundation of corporate governance as regulated in Law Number 40 of 2007 concerning Limited Liability Companies (Company Law) and its various derivative regulations.

In brief:

• Transparency requires disclosure of material and relevant information.
• Accountability emphasizes clarity of functions and responsibility among corporate organs.
• Responsibility requires compliance with laws and social obligations.
• Independence ensures decision-making free from conflicts of interest.
• Fairness guarantees equitable treatment for all shareholders and stakeholders.

The Company Law adopts these principles as mandatory guidelines in the management of the company. In practice in Indonesia, TARIF becomes the primary benchmark for shareholders, especially in assessing the performance of the Board of Directors and Board of Commissioners.

Transparency, for example, is reflected in the obligation to submit annual reports. Accountability is demonstrated through clear separation of duties between the Directors as management and the Commissioners as supervisors.

Responsibility requires compliance with legal provisions, while Independence mandates neutral decision-making in strategic matters. Fairness ensures equal treatment of all shareholders, including minority shareholders.

Understanding TARIF means understanding the basic expectations of the law and stakeholders regarding how a company must be managed.

1. Transparency

Transparency is the disclosure of material information relevant to shareholders and stakeholders.

In practice, transparency does not only mean preparing financial statements. It requires that important information be available in a timely, accurate, and understandable manner. Such information may include:

• Annual and interim financial statements
• Disclosure of affiliated transactions and conflicts of interest
• Ownership structure and changes of control
• Remuneration policies for Directors and Commissioners

A common issue in GCG implementation is the availability of formal reports without adequate disclosure of key information such as litigation risks, potential defaults, or debt exposure to minority shareholders.

Examples of practical implementation include:

• The Board of Directors presenting performance and business risk reports periodically at the General Meeting of Shareholders (GMS).
• Affiliated transactions being submitted to the Board of Commissioners and, when required, approved by the GMS with disclosure of value and fairness basis.
• The Corporate Secretary ensuring official reporting of changes in ownership and control.
• The Audit Committee reviewing financial statements prior to publication to ensure no material information is omitted.

Weak transparency may trigger internal conflicts of interest, create opportunities for fraud, and lead to disputes between majority and minority shareholders.

In public companies, the disclosure obligation under the supervision of the Financial Services Authority (OJK) confirms that transparency is a legal obligation.

However, even in private companies, information disclosure is a primary instrument for preventing conflict, especially in family business groups where access to information is often unequal.

2. Accountability

If transparency is about providing information, accountability is about clarity regarding who is responsible for what and to whom.

This principle demands a strict separation of functions between the GMS as the highest authority, the Board of Commissioners as supervisor, and the Board of Directors as manager. Without a clear structure, decision-making becomes blurred and difficult to hold accountable.

Effective accountability exists when every business decision can be traced and justified. This principle is closely related to internal control systems and risk management.

Examples of implementation include:

• Investments or expansions requiring approval of the Board of Directors within authority limits, and in certain thresholds, approval of the Board of Commissioners or GMS.
• A delegation of authority matrix regulating transaction approval limits.
• The Audit Committee periodically reviewing financial statements and compliance with internal procedures.
• Internal audit reporting findings directly to the Board of Directors and Board of Commissioners without interference from operational units.

An investment decision that fails to generate a return is a business risk. However, a decision taken without adequate analysis, or oversight represents a failure of accountability and has the potential to incur legal liability.

3. Responsibility

Responsibility means compliance with the law and corporate social responsibility.

This principle emphasizes that corporate governance is not only profit-oriented but also oriented towards compliance with laws and regulations as well as social and environmental impacts.

In practice, responsibility is reflected in:

• Compliance with sectoral regulations and licensing
• Tax compliance
• Labor law compliance
• Data protection and privacy compliance
• Implementation of corporate social and environmental responsibility programs (TJSL)

The Board of Directors is responsible for ensuring that the company does not operate beyond its purposes and objectives as stated in its articles of association. Regulatory violations may result in personal liability for Directors.

Compliance is often treated as merely administrative. In reality, failure to meet tax, reporting, or licensing obligations may directly affect corporate reputation and valuation.

4. Independence

Independence means managing the company professionally, free from conflicts of interest and pressure from any party that is inconsistent with laws and regulations.

This principle becomes crucial, especially in family companies and business groups with concentrated ownership. The dominance of controlling shareholders often influences decisions of the Board of Directors and Board of Commissioners, potentially marginalizing the interests of the company.

• In governance practice, independence is maintained through clear structures and mechanisms, including:
• The presence of Independent Commissioners without financial, managerial, or ownership relationships with controlling shareholders.
• Active involvement of the Audit Committee in reviewing material transactions and financial reports.
• Procedures for disclosure and handling of conflicts of interest in board meetings.
• Mandatory GMS approval for certain affiliated transactions.

Examples include: Directors with personal interests in a transaction abstaining from voting; affiliated transactions supported by independent fairness opinions; and Independent Commissioners chairing audit committee meetings without management interference.

Without independence, risks of unfair affiliated transactions, improper asset transfers, or corporate actions benefiting specific groups increase significantly.

An independent board is a prerequisite for objective oversight and protection of all shareholders, including minorities.

5. Fairness

Fairness is equal and equitable treatment of all shareholders and stakeholders in accordance with laws and the articles of association.

This principle ensures no discrimination, especially against minority shareholders, in corporate decision-making.

In governance practice, fairness is reflected through:

• Equal access to information for all shareholders prior to the GMS.
• Equal opportunity to ask questions and express opinions during the GMS.
• Independent approval mechanisms for material or affiliated transactions.
• Protection of minority rights in corporate actions such as mergers, acquisitions, or capital increases.

Concrete examples include: timely and complete distribution of GMS materials to all shareholders; use of independent appraisers to determine transaction pricing; and granting pre-emptive rights in capital increases.

When the fairness principle is ignored, common issues include disproportionate dividend policies, appointment of affiliated vendors without objective processes, or restructuring that harms minority shareholders.

To avoid conflict, companies need mechanisms ensuring that every strategic decision undergoes objective review and is approved by independent parties.

Fairness also includes fair treatment of employees, creditors, and business partners, so no party bears a disproportionate burden due to corporate decisions.

Updates to GCG Principles

Corporate leaders must not be complacent with TARIF alone. In 2023, the G20/OECD Principles of Corporate Governance were updated to reflect capital market dynamics and contemporary global challenges.

If TARIF is the foundation of GCG, the OECD 2023 Principles represent its modern architecture that Directors and Commissioners must understand.

The update does not replace TARIF but expands it into six key areas:

• Ensuring an effective corporate governance framework
• Rights and equitable treatment of shareholders
• Institutional investors, stock markets, and intermediaries
• Disclosure and transparency
• Responsibilities of the board
• Sustainability and resilience

The last two areas mark a significant shift. For the first time, sustainability and resilience are explicitly addressed as a separate chapter.

This means that boards of directors and commissioners are now expected to oversee and manage long-term risks, including climate risks, technological disruption, and geopolitical crises as part of their governance duties.

For Indonesian companies, this update expands the meaning of Good Corporate Governance from mere compliance with the Company Law to strategic governance that integrates risk management and sustainability.

Conclusion

GCG principles are not merely administrative compliance with Company Law or other regulations. TARIF forms the foundation of sound corporate governance, while the OECD 2023 update expands the perspective toward long-term sustainability and resilience.

Effective implementation of GCG directly impacts:

• Access to financing and investor confidence
• Legal protection for Directors and Commissioners
• Stability of shareholder relationships
• Corporate reputation and valuation

For Directors and Commissioners, corporate governance must be viewed as a risk management and business strategy instrument.

Companies disciplined in transparency, accountability, responsibility, independence, and fairness will be better prepared to face market pressures, regulatory changes, and ownership dynamics.

In an increasingly complex business environment, Good Corporate Governance is no longer an added advantage, it is a prerequisite for sustainable business continuity.

FAQ: Principles and Implementation of GRC