Indonesia’s State Enterprises Ministry Introduces Overhaul Of SOE Directors’ Selection Process.

Legal News & Analysis - Asia Pacific - Indonesia - Regulatory & Compliance

23 November 2021
 

A. Introduction

 

In order to improve the quality and accountability of new appointees to directorships in State-Owned Enterprises (“SOE Directors”), the Ministry of State-owned Enterprises (“SOE Ministry”) has issued Regulation No. Per-11/MBU/07/2021 on Requirements and Procedures for the Appointment and Removal of Directors of SOEs (“Reg. 11/2021“),[1]  which revokes Regulation No. PER-03/MBU/02/2015 on the same topic (“Reg. 3/2015”). Reg. 11/2021 introduces a number of changes to the process of selecting top executives for Indonesia’s state enterprises, including the concept of “talent management,” as elaborated below.

 

B. Talent Management

 

Talent management is a multi-layered process for the management and development of SOE Directors. It is implemented through a five-stage process: (i) screening and selection; (ii) assessment; (iii) classification; (iv) development; and (v) mobility. Candidates with directorship potential are sought from the following sources:

 

  1. The SOE Ministry, comprising Echelon I, II, and III officials,[2] as well as functional officials with a seniority level equivalent to at least Echelon III (“Prospective Ministry Candidates”);

  2. SOEs, which comprise SOE directors, executives who are one level below director level; or directors of SOE subsidiaries (“Prospective SOE Candidates”); and

  3. External candidates (“Prospective External Candidates”).

 

The following stages are involved in the talent management process:

 

a. Screening and Selection

 

During this stage, Prospective Ministry Candidates are screened internally by Echelon II officials, while Prospective SOE Candidates are screened by an SOE Candidate Screening Committee made up of representatives of the SOE in question and the SOE Ministry.[3]

 

Prospective External Candidates are screened by the Minister, Deputy Minister, and the Deputy for SOE Human Resources (the “Deputy”) from references provided by third parties or headhunters (if necessary).

 

b. Assessment

 

Prospective appointees who are identified by the screening process will then undergo background checks (of financial transactions, criminal record) before being designated as eligible candidates.

 

Eligible candidates will subsequently be designated as qualified candidates if the following criteria are fulfilled:

 

  • Competency standards (digital leadership, global business savvy, management diversity, ability to drive innovation, etc.);

  • Professional qualifications (financial, commercial, personal, operational and technological); and

  • Personal qualities (openness, conscientiousness, extroversion, agreeableness and stress tolerance).
     

c. Classification

 

Qualified candidates will be identified using a mapping process by the Deputy based on the assessment results.

 

This mapping process identifies suitable candidates for the office of director having regard to the class, function, and sector/cluster of the relevant SOE.

 

In addition, two other considerations are taken into account:

 

i. Talent Development
 

Personal development and candidates’ potential to develop themselves through experience, social learning and formal learning.

 

ii. Talent Mobility
 

Mobility is a process of talent development through the mechanism of work assignment within an SOE, SOE sector or cluster, and across SOE sectors/clusters. In general practice, mobility simply refers to the practice of rotating directors between different roles.

 

The talent development and mobility processes are to be further provided for by the Minister.

 

C. Appointment

 

To be appointed to an SOE directorship, a candidate should be drawn from the talent pool and should be selected after a fit-and-proper test or following an evaluation of assessment results by an independent, external recruitment agent.

 

All prospective appointees must first fulfill a variety of formal and other criteria prior to undergoing their fit-and-proper tests.  The test process and results are confidential, and only for internal use by the SOE Ministry.

 

Once a candidate is selected for appointment, this will be formalised by:

 

  1. a resolution of the General Meeting of Shareholders (“GMS”) if the SOE’s share capital is wholly owned by the state; or

  2. a circular resolution of the shareholders if the share capital is not wholly owned by the state.
     

D. Removal of Directors

 

An SOE Director may be removed at any time by a resolution of a GMS or a ministerial directive, with reasons for removal being given. The grounds on which a Director may be removed include:

 

  1. Failure to fulfil the obligations set out in their service contract;

  2. On account of a change in the SOE’s business strategy;

  3. They engage in an act that is detrimental to the SOE or the state;

  4. Long-term or frequent absence, including serious illness;

  5. Such other reasons as may be considered acceptable by the GMS or Minister, having regard to the interests and objectives of the SOE.
     

E. Prohibitions on Directors

 

SOE Directors are prohibited from concurrently:

 

  1. serving as a director of another SOE, local-government enterprise or private enterprise;

  2. serving as a commissioner of an SOE or another company;

  3. holding a structural or functional position in a central/local government agency or institution;

  4. holding anther position in contravention of the laws and regulations;

  5. serving as an executive of a political party, a legislator or local government chief executive or deputy chief executive;

  6. holding anther position that could cause a conflict of interest; and/or

  7. standing for election to a legislature or for the post of local government chief executive/deputy chief executive.
     

In addition, BOD members are also prohibited from holding positions concurrently as commissioners of other companies, unless:

 

  1. serving as a commissioner of a subsidiary or affiliate of an SOE, subject to their being entitled to receive only one income, being the highest income out of the concurrent incomes, unless otherwise stipulated by the Minister;

  2. serving as a commissioner of another company for the purpose of representing the interests of the SOE, subject to ministerial approval.

 

ABNR Commentary

 

By introducing a more transparent, systematic, and multi-layered approach to the appointment of SOE Directors, Reg. 11/2021 represents a positive response from the SOE Ministry to longstanding and widespread criticism of the quality and accountability of appointments made in the past. The new regulation is aimed at establishing a robust and accountable selection system that will help to ensure that the right people get the right jobs. However, whether the new system is sufficiently robust to actually achieve this laudable goal remains to be seen.

 

By partner Mr. Ayik Candrawulan Gunadi ([email protected]), senior associate Mr. Novario Hutagalung ([email protected]), and associate Ms. Nindi Saskia ([email protected]).
 

For further information, please contact:

 

Freddy Karyadi, Partner, ABNR

+62 818 103 949

[email protected]
 

[1] Peraturan Menteri Badan Usaha Milik Negara Republik Indonesia Nomor Per - 11/MBU/07/2021 Tentang Persyaratan, Tata Cara Pengangkatan, Dan Pemberhentian Anggota Direksi Badan Usaha Milik Negara

[2] An “echelon” is a structural level in the government employment structure and is divided into 4 levels, with echelon 1 as the highest level and echelon 4 the lowest. In essence, each level has the following duties:

  • Echelon 1: to establish basic policies so that long-term and short-term goals can be achieved.

  • Echelon 2: to plan and implement strategies to develop key regional policies.

  • Echelon 3: to prepare and realize the agency’s strategies as specified at echelon II level.

  • Echelon 4: responsible for operational activities prepared at echelon III level.

[3] SOE Candidate Screening Committees are to be established to screen and evaluate candidates in order to identify SOE Candidates to be proposed to the SOE Ministry.