SECOND POSITION PAPER FOR RECOMMENDATIONS CONCERNING GOOD CORPORATE GOVERNANCE

(Detailed Comments)

This position paper is a detailed reaction on the Code for Good Corporate Governance (the Code) as drafted by the National Committee on Corporate Governance on May 1^st, 2000. The position paper consists of:

¨ Recommendations for improvement of the current legal framework, based on possible inconsistencies of the Code with the current other laws that the companies have to abide with, e.g. Company Law (UUPT), Law on Capital Market, Banking Law etc;

¨ Practical problems that may arise in the implementation of each provision of the Code and recommendations to companies;

¨ Suggestions for changes in the Code.

These comments do not aim to create a new structure, but they follow the structure of the Code.

General

Preamble

Comments: There is no strategy regarding the implementation of the Code, therefore a more implementable strategy and solutions in socializing the Code have to be made as a practical guide.

There is no clear statement regarding the legal status of the Code. A proper balance must be found between Law and Code, in other words: What is mandatory and what is voluntary. Our suggestion is to affirm the Code is a best practice with reference to globalization and international harmonization. The Code should be promoted as a guide for best practices which will be sanctioned and rewarded by the market, and flexible enough to accommodate the differences amongst companies. It should not be treated merely as a rigid regulation that may lead to myopic behavior on the part of stakeholders and, in the long run, as has been proven in different markets, such a prescriptive approach may stifle the development of corporate governance.

Still in regard with the Purpose of the Code, we suggest to add the management, beside shareholders, as a party who should make every effort to decide and act upon corporate matters with a strict sense of morality and under principles of good corporate citizenship and social responsibility.

It is not clear from reviewing the Code, whether it has been formulated with reference to a particular international guidance, for example the OECD principles or consistently following any particular system (for instance, Anglo Saxon or Continental). A greater reference to international practice will be necessary to compare including a section which contrasts any significant areas of difference between the Indonesian Code and accepted international models.

We suggest to declare that the Code is addressed not only to public listed companies but to all companies. The development of different codes for different sectors/classes of companies creates potential ambiguity and inconsistency and is therefore not welcomed.

Final Comments: The Labor and Environment matters should be addressed by referring to international accepted principles and Indonesia's international treaty and convention obligations.

Comments : We agree with the statement that shareholders rights must be protected, but it is not clear who within the company is primarily responsible for introducing the "appropriate procedures" which are required, or indeed what those procedures might be.

Furthermore, there is no specific mention of these obligations in the roles and responsibilities of Komisaris, Direksi or Corporate Secretary.

Our suggestion is that the Direksi should be responsible to ensure the implementation of shareholder rights and equitable treatment of shareholders. The shareholder rights are:

1. the rights to attend and vote at any GMOS on a one share one vote basis, in accordance with share classification as set out in the Article of Association of the company;

2. the rights to obtain relevant corporate information in a timely and regular manner to enable a shareholder to make informed investment decisions concerning their shares in the company;

We note that there is inconsistency between Company Law, Capital Market Law, and regulations issued by BAPEPAM with regard to the corporate information as per point 2 above.

Comments : Companies in every market should provide equitable treatment to all shareholders, including foreign investors. In particular, companies should respect the interest of minority shareholders and not take actions which significantly disadvantage them or their investment.

Commissioners and shareholders have a special duty to question management decisions that benefit only one class of shareholders at the expense or detriment of other shareholders. BAPEPAM regulations prevent majority shareholders from voting on transaction with a potential conflict of interest between majority and minority shareholders.

Comments : Basic principle is that the interest of the company comes first, taking, however, into consideration the interest of stakeholders.

In this section it is stated that the minority shareholders include: monitoring rights, compensation, special majorities, and exit rights. Our opinion is that protection of the rights of minority shareholders should not lead to minority shareholders hampering the development of the company.

There should also be an obligation to disclose the ownership of the share by both the shareholder that directly or indirectly owns 5 % or more of the shares of the company and the company of which 5 % or more of the shares are owned by a single shareholder.

In case minority shareholders are a relatively large number (as is normally the case in listed companies), decision where there is conflict of interest between company's interest and management or majority shareholders interest, the ruling of a required majority of the minority approval including quorum requirements may be adequate.

Comments : The section dealing with implementation may be misplaced - the comment seems to relate to section VII Disclosure.

The GMOS should appoint the Independent Commissioner(s) which represent the minority shareholders in their duty. The GMOS should appoint the independent commissioners and they could be nominated by minority shareholder.

Comments : An Appointment and Remuneration Committee should be appointed by the GMOS.

The GMOS may mandate the Dewan Komisaris to prepare an Appointment and Remuneration Committee that prepares an appointment and remuneration system.

In state-owned companies the remuneration of Komisaris is now determined as a percentage of Direksi's. This has to be avoided.

Comments : We would support a greater level of guidance as to the areas of responsibility (eg. reviewing major policies of the organisation, selection and remuneration of Direksi, strategy and planning, performance monitoring, considering major business risk, overseeing the ethical conduct of the company, overseeing a system to ensure effectiveness of the internal control and the audit function, etc.).

The stated principle that Komisaris “shall be responsible, and have authority for, supervisory the policies and actions of Direksi and giving advice to the Direksi where required” is correct but seems to overstate the authority of Komisaris which is actually provided under the Companies Law. We question whether Komisaris currently have legal authority over either policies or actions of the Direksi. This legal authority has to be strengthened to match the responsibilities of the Komisaris.

We believe that this is an important area of the Law which causes ambiguity and confusion amongst Komisaris and Direksi and may require amendment. The law seems to impose responsibilities (and by implication accountability) on the Komisaris which are not matched by their powers - in particular because Komisaris do not have the power to select, evaluate and replace Direksi.

It is beyond the scope of this letter to fully explore this point but we suggest that it requires further consideration.

In regard with the function of the BoC, we propose to add a statement that the BoC should review and approve the long term plans and strategy as well as the major policies and the annual plans.

This section of the paper contains a number of matters which go beyond the stated heading: “function of the Komisaris” and should be included under separate headings. For example “the character and relevant experience of Komisaris” should be included under the heading “composition of Komisaris”. The manner in which Komisaris should conduct themselves might be included under a new heading of “Duties of the Komisaris”.

Under such a heading there might also be included relevant discussion and guidance on dealing with conflicts of interest. Aside from very general disclosure requirement, there is no mention of a Commissioner’s (or Director’s) fiduciary duty to put the interest of the Company before any personal or other interests.

It is necessary to make some criteria on selecting the Commissioners. These criteria are required to select the Commissioners with a good character and relevant experience.

However to elaborate the function and responsibility of the Commissioners, it is necessary to refer to how the function and responsibility of the BoC in the Netherlands Legal Systems works.

Comments : There is no clear definition of what is an “outside member” of the Komisaris for the purposes of applying the 20% rule. There are internationally accepted definitions of "outside" or "independent" that could be used here.

2. The Commissioner is not substantial shareholder of the company or an officer of or otherwise associated directly or indirectly with substantial of the company.

3. The Commissioner has not within the last three years been employed in an executive capacity by the company/another group member or been a director after creasing to hold any such employment.

4. The Commissioner is not a principal of a professional adviser to the company or another groups members.

5. The Commissioner is not a significant supplier or customer of the company or another group member or an officer of or otherwise associated directly or indirectly with a significant supplier or customer.

6. The Commissioner has no significant contractual relationship with the company or another group member other than as a director of the company.

7. The Commissioner is free from any interest and any business or other relationship which could, or could reasonably be perceived to, materially interfere with the Commissioner's ability to act in the best interest of the company.

It is necessary to make the detailed criteria regarding the 20 % or minimum 1 (one) of the members of Commissioners being Independent Commissioners. These criteria will be useful to select on what the Independent Commissioners is.

Comments : It is unclear to what extent Komisaris must actively verify that Direksi observe laws and regulations.

Therefore, compliance with laws should be monitored by the Audit Committee. Especially the Commissioners may establish such committees.

Comments : The BoC should meet at least every two months. It is proposed to hold joint meeting amongst the BoC and the BoD minimum quarterly in a year.

Comments : It is unclear what information would typically be required by Komisaris. This section of the code would be more helpful and less open to abuse if it were to be expanded to include examples and/or minimum information requirements.

The numbers of independent Direksi in the composition of Direksi better be greater than the non-independent one(s), so that the independent Direksi will always have cast vote over the meeting of the Direksi

As with comments on composition of the independent commissioners, it has to be defined on what the independent directors are; what the criteria are.

Comments : We do not consider it appropriates that the minutes of directors meetings should be made available to shareholders of the Company, given that such minutes are likely to contain commercial and/or potentially price sensitive information.

In the provision regarding Meeting of the Direksi, procedure to discharge the Direksi are suggested to be made by considering the fact that the Direksi has internal and external liability. Internal liability, i.e.: the liability towards the company in which the liability of the members of the Direksi are discharged through the Annual General Meeting of shareholders. This, however, will not discharge the Direksi from External liability, i.e.: their liability to third parties.

Comments : Given the importance of this section, we believe that the level of guidance as to what is required should be significantly expanded.

Furthermore, we would argue that it is unusual to classify risk management is a sub-set of internal controls. The context in which this term is used here should be clarified and the role and responsibilities of Direksi in relation to risk management should be spelt out.

Comments : The external auditor shall be appointed by GMOS and their qualifications, term of reference and remuneration shall be recommended by the Audit Committee, provided that the auditor so determined possesses the required license from the Minister of Finance or registered with BAPEPAM. Such auditors shall perform fair and accurate audits in accordance with the applicable auditing standards and maintain complete independence from management, the Direksi, Komisaris, and Stakeholders of the company.

Comments : We believe that the members of the Audit Committee should be Komisaris only. It would not be appropriate in our view for external auditors or senior members of the internal audit staff to be members of the committee, although they should be asked to attend some parts of those meetings. For example, the external auditor should not attend the part of the meetings during which the effectiveness of the external audit was being evaluated.

The duties of the Audit Committee should include responsibility for oversight of effective internal control, reliable financial reporting, compliance with regulatory matters, and compliance with the corporate code of conduct. Furthermore the code should recognise that international best practice is for the Audit Committee to have a further expanded role which might include consideration of topics such as business risk, IT or E-commerce risk, risk to major projects, business continuity plans etc.

The Code should recognise that BAPEPAM have now issued a rule that listed companies must have an Audit Committee.

To effectuate the provision regarding Audit Committee, numbers of Independent Komisaris in the composition of Komisaris better be greater than the non-independent one(s), because the Audit Committee can be removed by unanimous vote of the Komisaris.

Audit committee organized as a standing committee of the BoC and has a major responsibility in assuring that the mechanism for corporate accountability are in place and functioning.

The responsibility of audit committee in the area of financial reporting is to ensure that financial disclosures made by management reasonably portray the company's: Financial Condition, Result of Operation, Plans and Long Term Commitments.

With respect to the review of accounting policies and policy decisions, a useful approach would be to require from the chief accounting officer a concise summary of all significant accounting policies underlying the financial statements.

The responsibility in this area is to provide assurance that the corporation is in reasonable compliance with pertinent laws and regulations, is conducting its affairs ethically, and is maintaining effective controls against employee conflict of interest and fraud.

· Reviewing corporate policies relating to compliance with laws and regulations, ethics, conflict of interest and the investigation of misconduct and fraud.

· Reviewing current/pending litigation or regulatory proceedings bearing on corporate governance in which the corporation is the party.

· Reviewing significant cases of employee conflict of interest, misconduct and fraud.

· Requiring the internal auditor to report the scope of reviews of corporate governance and any significant finding.

The responsibility includes an understanding of the company's key financial reporting risks areas and system of internal control. The committee should monitor the control process through internal auditing, as the scope of the internal audit should encompass the examination and evaluation of the adequacy and effectiveness of the organization's system of internal control and the quality of performance in carrying out assigned responsibilities.

The Audit Committee should be made up of individuals who are independent of the day to day management of the entity and Chairman of the Audit Committee must be Independent Commissioner and who have the necessary program and/or management expertise to perform their review function effectively (According to BAPEPAM Rule, the members of the Audit Committee at least consists of 3 (three) members which one of them is Independent Commissioner and at all once the Independent Commissioner grips the Chairman of the Audit Committee). One of the primary reasons for this independence is to ensure an unbiased perspective on reports and recommendations brought to the committee and independent individuals would be more apt to be impartial and objective in such matter. The number of members on the audit committee should be determined by the size of the organization. Three to five members, however, is usually ideal. The Audit Committee will normally find it necessary to meet three or four times annually in order to fulfil its financial reporting responsibility.

In addition, the new definition of internal auditing states that internal auditing is an independent objective assurance and consulting activity designed to add value and improve an organization's operations and 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.

The responsibility of the audit committee should be stated in formal written charter or equivalent document that is approved by the full board or governing body of the entity, as appropriate. The charter should articulate the authority, responsibilities and structure of the audit committee. The responsibilities, at a minimum, should address financial and other reporting practices, internal control and compliance with laws, regulations, and ethics. The charter should also state that audit committee will meet periodically and may call additional or special meetings as needed. If possible, the authority, responsibilities and structure of the audit committee should be provided in the governing law of the entity.

Comments : The key requirements of the job of investor relations officer should be discussed in the Code.

The responsibility of the Corporate Secretary to keep the Registers and minutes seems to conflict with similar requirements which the Code imposes on Direksi, as noted in III (5) and III (1).

There are two roles of CS, i.e.: in a one tier system the CS acts both as CS itself and also as Commissioner having duties to supervise the policies and actions of the Directors and to give advice to the Directors. In a two tiers system the CS acts as investor relations manager (as BAPEPAM requires for public companies) and where the role to supervise and giving advice to the Directors becomes the Commissioners' functions. So in a two tiers system the role of the CS is not as strong as in one tier system.

The position, function and role of the CS could however be far more useful than simply investor relations officer. The function as a compliance officer should be more elaborate and defined.

An important role for the CS is to function as a liaison between BoD and BoC. The CS should therefore attend all important meeting of the BoD, BoC and definitely the joint meeting between BoD and BoC.

In order to stress the importance of a proper functioning CS, a senior rank should be attached to the CS. It may not be preferable to have the CS as a member of either the BoD or the BoC.

The relationship with the outside world, whether it is Government Agencies or other stakeholders is clearly one of the priorities for the CS.

Comments : We are generally supportive of requirements for key managers to hold sufficient and appropriate qualifications. However, we question whether it is appropriate for there to be a mandatory level of qualification for the Corporate Secretary when there is no such requirement for any other executive, such as the Chief Financial Officer, the IT Director or any of the Direksi/Komisaris.

Because of the potential importance of the CS, we should look more into personality and character qualifications than pure scholastic qualifications.

Comments : It is not clear to us how in practical terms the Corporate Secretary can advise Komisaris of all actions he has taken.

The CS is accountable directly to the BoC and is ranking equal to members of the BoD. The CS has a supporting role to play for the BoD and BoC.

Comments : We question whether in practice, the job of ensuring appropriate disclosures are made by the organisation would not fall more naturally to the Chief financial officer.

Comments : Again, it seems that in practice, the establishment of Corporate Information Systems would most naturally be a responsibility of the Corporate Secretary rather than the Direksi.

Comments : It is unclear from this section of the code whose responsibility it is for considering shareholder rights. For example, is this an issue which the Komisaris should consider?

The rights of interested parties should be properly defined and understood by all parties.

In case of dispute we should try the right vehicle for an open and frank discussions.

Only in case of no solution between the parties involved, regulatory agencies should be called for a binding decision.

The rights of the pledgee (under a share pledge agreement) should also be protected. Even though the applicable laws and regulations sounds perfect, in practice, lenders acting as Pledgee always has difficulties in enforcing their legal rights.

Comments : We should avoid a too close involvement of the respective stakeholders since this could hamper the activities of the company.

2. Beside the institutional issues, there are some principle issues addressed in the Code that need to be discussed such as :

Points contained in the Disclosure principle consist of Matters of Material Importance to Decision Making *), Disclosure of Corporate Good Governance Structure, Timely and Accurate Disclosure, Annual Report, and Disclosure of Price Sensitive Information. Especially these principle points are necessary to be figured out on their implementation.

h. a sale of a material amount of Securities to the public or in a limited manner;

k. any important litigation against the company and/or the company’s directors or commissioners;

Comments : The general principles of this section are agreed. However, we believe that it should be expanded and elaborated further to give more comprehensive guidance in areas such as related party transactions and remuneration/benefits in kind of Direksi and Komisaris.

The principle of Financial Statements Disclosures is that the company should observe disclosure requirements in all the prevailing PSAKs (Pernyataan Standar Akuntansi Keuangan or the Indonesian Statements of Financial Accounting Standards) and generally accepted accounting principles.

In regards with the disclosure matter, The Code should require other Non Financial Disclosures including but not limited to:

· Ethical Issues (bribery and corruption, money laundering, code of ethical conduct);

· Risks (market, credit, liquidity, technological, health, safety, environmental, etc) and Internal Control Issues

How the Confidentiality principle on the Code can be implemented and what problems may arise.

Comments : The duty of confidentiality should presumably extend to other executives of the Company. Should there be a requirement for the Direksi to introduce and enforce appropriate company policies in relation to this? As noted earlier, this matter might be covered as part of a wider requirement to act in an ethical and socially responsible way, as might be contained in a company code to conduct.

The regulating agencies in co-operation with the Chamber of Commerce and other associations should find and define the right balance between Confidentiality and Transparency.

How the Confidentiality principle on the Code can be implemented and what problems may arise.

Comments : Regulating Agencies (like BAPEPAM) should be well aware of the borderline between inside information and confidentiality.

Lacking sufficient experience could easily make decisions by the regulating agencies arbitrary.

Even if the matter may be put to court we vary much doubt that Indonesia has enough expertise in this field. (Foreign - professional consultants could perhaps solve, at least temporarily part of this problem)