May 7 marked ALB’s entry in the burgeoning Indonesian legal market with the organisation of the first Indonesia In-House Legal Summit in Jakarta. Unprecedented for an inaugural event, the Summit was supported by a record number of eight sponsors and attracted more than 200 of Indonesia’s key legal experts at the Hotel Pullman Jakarta Indonesia Thamrin.

The chairman of the Indonesia Investment Coordinating Board (BKPM), Mahendra Siregar, opened the conference with a detailed update on Indonesia’s economic performance, offering a candid politico-economic reasoning for recent regulatory changes. Indonesia continues to boast stellar economic results including a 14.6 percent inbound investment growth worth 606.6 trillion IDR. Importantly, the country’s domestic-foreign investment ratio has changed from 1:5 five years ago to 1:2 underlining the increasing strength of the domestic sector as Indonesia embarks on a more advanced investment growth path, shifting from manufacturing towards services. In terms of mid- to long-term trajectory, BKPM projects an optimistic growth outlook for the next five to ten years, driven by the growing middle-income class with an expanded purchasing power. Siregar, however, cautioned that growth can only be sustained if long-term competitiveness is built based on productivity and efficiency. He voiced BKPM’s aim in following in the footsteps of Western economies, including the promotion of creative industries and venture capital/angel investor-driven start-ups/incubators.

Recently enacted investment and mining regulations

Swift policy changes, including the rise in interest rates, have allowed Indonesia to bounce back from the “Fragile Five” currency crisis in 2013. On the legislative front, new Industry and Trade Laws were enacted and Presidential Decree No. 39/2014 introduced a revamped Negative Investment List (DNI). Prior to the imminent parliamentary and presidential elections in 2014, BKPM implemented 15-step ease of business guidelines including the setting up of a one-stop service facility issuing company licences online without the need to apply for approval by the local government. BKPM has also proposed a two-tier formula for the improvement of the national wage system by enforcing minimum wages across all provinces and linking wage to productivity, which would further facilitate  Indonesia’s transition from a resource-based to a productivity-based economy.

The regulatory changes outlined by BKPM gave way to a heated discussion among industry leaders in a panel moderated by AKSET Law’s founding partner, Johannes Sahetapy-Engel. Tony Wenas of the Indonesian Chamber of Commerce and Industry (KADIN) pointed out the burdensome nature of Indonesia’s new mining regulations: Mining Law No. 4/2009, called for the divestment of foreign investor shares in mining ventures after the first five years of operation, with no information, however, on the exact percentage. Ministry regulations, since then, have specified the divestment level at 20 percent by year six, increasing it to 51 percent thereafter; an announcement, which led to an immediate share price drop and withdrawal of investment. Regulation No. 6/2014 has introduced interim measures to temporarily ease the 2009 ban on the export of unprocessed minerals,  as well as the progressive calculation of export duties placed on raw materials. Wenas, however, claimed that taking into account the huge processing costs, the export duties have pretty much nullified the profit margin of mining companies, while the divestment requirements have only aggravated the decline in the sector.

Representing the international perspective, Takeshi Komatsu of Mori Hamada & Matsumoto stated that the DNI is perceived by foreign investors as a means of economic nationalism and Japanese manufacturers demand more clarification, especially on the regulation of distribution businesses. Abadi Abi Tisnadisastra of AKSET Law asserted that previous DNI regulations showed inconsistency in their implementation, but he was hopeful that the new rules will be the sole reference for investment restrictions, honour the grandfather provisions on existing investors, and clear up the ambiguity surrounding publicly listed companies.

The panel agreed that rather than focusing on debates on ownership, government policy on nationalisation and localisation should instead ensure that the general public and investors receive maximum benefits via improved national competitiveness and investment attractiveness.   Sahala Situmorang of Ernst & Young echoed Siregar's claim that investors, both domestic and foreign, should take advantage of the favourable investment conditions in Indonesia, stressing that it should be economic rather than regulatory considerations which ought to matter when investment decisions are made.

Surging ethics and corporate governance rules

Chairman of the key body for Indonesia’s in-house legal community, PERADI, Ricardo Simanjuntak,  gave an equally compelling keynote speech on the evolving status and responsibilities of in-house counsel in Indonesia. As an organisation, PERADI has worked relentlessly to bolster the legal training and recruitment system with the establishment of the Continued Legal Education (CLE) framework, thus facilitating access to justice and creating a forum for both domestic and foreign lawyers. PERADI has also endeavoured to instil high moral and professional standards in legal practitioners, lobbying for a compulsory Code of Ethics examination and a mindset that affords legal protection not only inside, but also outside the courts.

Ethics served as the overarching theme for the presentation of Professor Syed Abdul Hamid Aljunid of the Global University of Islamic Finance (INCEIF), with the statement that good governance is key to successful business. Companies must align the tone at the middle and at the top, introducing a so-called “Apply or Explain” framework, which is akin to a proactive “beyond compliance” system of governance. Professor Aljunid claimed that compliance is currently “perceived as a cost centre and not a value contributor,” and argued that “ethics training has to be the foundation and not an addendum to corporate governance” including appropriate measurements to monitor that the organisation walks the talk. He, therefore, called for a rethinking of the motivation, formulation and integration of ethics programmes, and the consideration of sharia-compliant corporate governance systems.

The afternoon session commenced with an informative panel discussion on the new Good Corporate Governance Code and the Consumer Protection reforms in Indonesia’s financial sector. Krisdianto Nugroho of AIG Insurance spoke about the Financial Services Authority (OKJ)’s Regulation No. 1/2014, which has introduced more stringent customer protection measures in the financial services sector. Nugroho explained that while the legal framework is in place, educational campaigns must be conducted to ensure that consumers are aware of what their rights are, and how to exercise them. In response to delegates’ questions on how corporations can best handle consumer complaints, Nugroho recommended a low-profile approach without the mention of the word “legal.” Rista Manurung of Sun Life Financial, proposed for the establishment of Standard Operating Procedures (SOPs) incorporating clear categorisation of complaints and matching responses, the documentation of all correspondence, and a formal escalation process. She suggested that an independent committee could assist this process and handle specific cases, for instance, escalated complaints from regulators or complaints through media agencies.

Manurung continued with a detailed overview of OJK’s Regulation No. 2/2014, which introduced corporate governance rules specifically for insurance companies, revoking the previous guidelines by the Ministry of Finance. The Regulation states that insurance companies have a 12-month deadline to make sure that 50 percent commissioners are independent, while a designated independent commissioner must chair the committees of the board of commissioners namely the audit and risk committees.

These ambitious rules have readily been adopted in the banking sector since 2006, but the tight deadlines give rise to recruitment challenges, excessive administrative burdens and costs on the insurance sector, which call for a more incremental transition. Both Manurung and Nugroho agreed that insurance companies should use the General Insurance Association and the Life Insurance Association as a pathway to communicate these concerns to regulators and voiced their hope that the proactive involvement of the OJK would lead to quicker and more standardised regulatory processes.

Anti-corruption efforts and the new Industry and Trade Laws

The concluding panel of the conference offered a variety of perspectives from the manufacturing, services and retail sectors on Indonesia’s anti-corruption efforts. Angela Hertiningtyas of Procter & Gamble argued that corporations can no longer hide bribery cases behind third-party counterparts: Companies like P&G conduct severe due diligence procedures on vendors including interviews and case studies conducted by the Purchasing Department, official certifications and continuous scrutinisation. Arshella Mailoa of First Media commended the government’s latest anti-corruption efforts, specifically in the entertainment industry, where the government has put increasing pressure for the submission of all documentation in the case of broadcasting licences. Both Hilton King of Sampoerna Strategic and Herumurti Sutaryo of British American Tobacco called for proactive communication with industry associations and local governments to ensure that business objectives are met within the boundaries of formal law.

The panel thereafter guided the discussion back to the Summit’s overriding theme on Indonesia’s latest legislative changes. Gilang Hermawan of Siemens reported on the company’s consultation with the Ministry of Industry regarding the new Industry Law, pinpointing the implications for foreign employment, the localisation of manufacturing facilities in designated industrial zones, and new national product standards.  All in-house counsel on the panel agreed on their respective roles in anticipating new legislations such as the Trade and Industry Laws, providing proactive input during the drafting process, and ensuring that the new laws will serve Indonesia’s aim to cure underinvestment, ensure greater localisation and faster integration in the coming year’s planned Asian Economic Community. One of their major challenges in achieving this is the paradox of regionalisation and protectionism, characterising Indonesia’s current politico-economic agenda. 

The perfect ending to the conference was the testimony of a senior-level counsel of a well-known retail company. While sharing her personal journey as an in-house counsel, she explained that after 11 years in private practice, she embarked on a challenging corporate path, juggling a dual role as the company’s first legal director as well as a member of the executive committee and board of directors. During her talk, she echoed the overall message of the Summit: Being an in-house counsel in Indonesia is no longer about the black and white interpretation of the law, but instead offers a “mind-blowing experience up the ladder, over the fence and out of the terrain.”