Ethical reporting broadened to include CP. Vol 111

This article recognizes that the key government bodies, including the OJK and ESDM, assign the responsibility for company reporting to the directors. The ethical behaviours of such directors are typically very good, but occasionally can be compromised, as reflected by the recent scandals of Jiwasraya insurance and Garuda airlines. The professional reporting of resources and reserves has to comply with a number of regulations, along with a strong professional association mechanism to enforce ethical reporting standards. The launching of the new Minerba’s Exploration Monitoring System (EMS) is a clear step in the direction of broadening reporting from the sole control of the directors, and into the hands of registered and accountable professionals.

Background.

The recent scandals of the state insurance company Jiwasraya “pump and dump” financial impropriety, along with the state airline Garuda’s directors’ incorrect approval of a faulty annual financial statement, along with inappropriate operational actions, have cast a shadow over the ethical reputation of some leading company directorships. In each case the state has moved very quickly to rectify these scandalous cases, to restore the publics good faith in credible and ethical leadership of the state’s companies. All companies around the world can be victims of poor practices by some company directors. 

Company directors focus is on overall well-being of the company, but sometimes this can conflict with transparent and professional reporting. For example, during the recent long-term dip in commodity prices, a number of coal companies annual reports referred to resource & reserve statements prepared during the earlier high price years, rather than reassign the reserve statements as consistent with the lower strip ratios being applied during the low-price years.

It is timely to look into the nature of directors operating in the exploration and mining industry.

Government Regulations for Directors.

There are many laws and regulations that guide the performance of directors. The Financial Services Authority Regulation No. 33/POJK.04/ 2014 concerns the Board of Directors and Commissioners of Issuers or Public Companies. This regulation sets out much of the mechanics, duties and responsibilities for directors. The includes criteria for directors as having good character, morals and good integrity, legally competent, and in the past 5 years have not been bankrupt, no criminal record and so on. Chapter IV sets out the guidelines and code of ethics, while Chapter VI sets out the administrative provisions for sanctions, though other regulations may impose certain criminal sanctions. The Financial Services Authority can publicize the imposition of administrative sanctions.

Many regulations on directors are compliant with international norms and standards. For example, the OECD in collaboration OJK launched The New G20 / OECD Principles Of Corporate Governance (CG) in Jakarta in September 2015 at the G20 meeting in Ankara, Turkey. The OJK had previously issued OJK Regulations (POJK) related to implementation to Good Corporate Governance (GCG) which consists of five aspects (1) Guaranteeing public shareholder rights; (2) Function and role of the board of commissioners; (3) Function and role of the directors; (4) Stakeholder participation; and (5) Open information.

Defining Directors ethical role.

Extracts from Dr Simon Longstaff AO, executive director, the Ethics Centre, and others, from an on line publication from the Australian Institute of Company Director (AICD) include: –

Directors are bound by fiduciary and statutory duties, including the duty to act in the best interests of the organization. Directors are bound to apply the values and principals of the company, and also have the capacity to define and amend a corporation’s ethical framework. The director’s touchstone must be the interests of the company as a whole – not its shareholders, not its employees, not anyone else. Ethics concerns “What should be done – even if not required or prohibited by law”.

Ethics is the branch of knowledge and practice that seeks to answer the practical question “what ought one do?”. This question applies to both individuals and organizations. At a recent AusIMM webinar, on conflicts of interest#2, David Abbott Jr gave a simple guide to one area of ethics as; – “Would you like to see your name on this story in tomorrow morning’s newspaper?”

Directorship training.

The Indonesian Institute for Corporate Directorship (IICD) is a non-profit organization founded by 10 reputable business schools that provides training programs for directors, commissioners and officials two levels below directors [ www.iicd.or.id ]. The program emphasizes the principals of Good Corporate Governance. Modules in the IICD Program are adapted from the GCGF (Global Corporate Governance Forum), the United Kingdom Institute of Director (IOD), the Australian Institute of Company Director (AICD), the National Association of Corporate Directors (NACD) USA, Yale University, International Financial Corporation (IFC) with reference to the current situation and conditions in Indonesia and the world. Each year various workshops on good corporate governance are held. A similar organization is the Lembaga Komisaris dan Direksi Indonesia (LKDI) who’s mission is to improve professional qualifications, personal integrity, and social responsibility of Commissioners and Directors, ( www.lkdi.org ]. The LKDI directorship training & certification program is aimed at good corporate governance in support of the Komite Nasional Kebijakan Governance (National Committee on Governance – NCG) Indonesia.

There are also several entities that may be engaged by corporations & SEO’s seeking reviews of prospective directors. These include Pendidikan Pembinaan Manejemen  (PPM Managemen) [ http://ppm-manajemen.ac.id ] and PT. Korn Ferry [ www.kornferry.com ]. There are numerous other legal and human resource firms that will also undertake background checks on prospective directors and commissioners. At a 2015 Ausmincamb presentation it was noted that Peter Coleman [ www.aegisinterakifasia.com ] and others can also provide private forensic research of directors and other key company officers etc.

Mining Governance Ranking & EITI.

The index for mining governance in Indonesia shows the Resource Governance Index (RGI) in 2017 is 68 out of 100, and ranked 11th among 89 ratings (81 countries). One positive trend includes the government’s program is to operate a beneficial ownership roadmap, using standards from the Extractive Industries Transparency Initiative (EITI) as a basis for developing regulations covering the extractive sector and other sectors.

Beneficial Ownership.

Presidential Regulation of the Republic of Indonesia Number 13 Year 2018 (Perpes 13 of 2018) is about the principle of recognizing Benefit Owners from corporations, in order to combat various crimes. The definition of the beneficial owner is an individual who has the influence on corporate funds. Such control may be to appoint or dismiss directors, commissioners or management, has the ability to control the company or is entitled to directly or indirectly receive significant benefits (more than 25% share) in the company. The Ministry of Energy and Mineral Resources (ESDM) is one of the first ministries to implement the Beneficial Ownership program. Compliance with the declaration of beneficial ownership requires submitting shareholders and directors’ details (including personal tax number), and deed of incorporation for the mining business.

The EITI Indonesia 2017 annual report includes a short Beneficial Ownership section that lists some 12 companies, out of Indonesia’s top 122 companies, that did not submit Beneficial Ownership reports to Minerba. The 2018 EITI report is to include the pilot project to collect information on Beneficial Ownership, so that it can be used in 2019, before Beneficial Ownership information disclosure becomes an obligation in 2020.

IDX directors.

The Indonesian Stock Exchange (IDX) have various regulations that assign reporting responsibilities to the directors of a company. Upon listing on the mining board, the public company is required to have at least one director with a suitable professional background, but such requirements are not specified for ongoing activity.  A review of the 2017-18 mining board companies’ annual reports shows there are 31 mineral & coal companies of which 25 now have technical directors, of which only 6 are listed as members of professional associations (AusIMM, KCMI) with ethical standards. Another review of 47 IDX mining board companies (including energy companies) from 2017-18 annual reports identified there are 193 commissioners and 206 directors that are responsible for managing much of the mining industry.

All of the IDX listed companies have their directors sign off on the independent financial reports. The recent Garuda audit scandal shows that even independent financial audits need to have strong checks on the ethical character on those who are preparing such reports. There is a MOU between the IDX and MGEI wherein a mineral or coal IPO should have its resource and reserve statements checked for professional reporting code compliance before being cleared for listing. There are no further independent industry checks on subsequent exploration or annual reports, wherein the directors are fully responsible for the content of such public reporting. There is the possibility that ongoing IDX public reports on resources and reserves may not be compliant with the professional reporting code standards as complied with by the authors. It is even possible that directors could amend or leave out aspects of the competent persons technical report. The personal background of the directors and commissioners are set out in all IDX company annual reports. The presentation of such backgrounds tends to follow a formula of where they come from, education and work background etc, but there is typically no reference to belonging to affiliations with ethical responsible associations.

Most IDX listed company reports contain a section on good corporate governance. These sections tend to focus down on company staff, while details on director training are often buried in the section on company training programs. A reviewer may need to look back several years of Annual Reports to find earlier director training events.

ESDM Regulations to track directors.

During the boom of application of more than 10,000 IUP’s, it is understood that general business regulations did not have a “consent to act” requirement for the appointment of directors, commissioners and other key company appointments. This meant a company owner can appoint their driver as a company director, even without seeking their consent, or even to inform the driver of their appointment. Minerba addressed the nomination of directors within the broader Clean & Clear (CnC) program. Note that the present number of IUP’s is now about 2,400.

The Ministry of Energy and Mineral Resources (ESDM) has various regulations that place the responsibility of reporting upon the directors of a company. For example, decree No. 1796 of 2018 for the provision of guidance on the application of permit, evaluation and licensing in mineral and coal mining sector, and to implement the ESDM regulation No. 11 / 2018 and its amendment No.22. This decree became effective on 19 April 2018. The guidelines are for the processing of various requests, and includes changes in stocks, directors and commissioners. Appendix VIII sets out the requires for an application to change the composition of the board of directors and or commissioners of business entities. The directors must make an application letter to the ESDM, attaching a resolution by the board of directors along with other documents that include the last 2 years annual tax return statement (SPT) of the proposed director, information related to beneficial ownership etc.

KCMI & Competent Persons.

Komite Cadangan Mineral Indonesia (KCMI Code) is a professional code that is being used as guidelines for public reporting of mineral and coal Exploration Results, Resources and Reserves. The KCMI code of reporting is recognized by CRISCO – the international body for registering codes of reporting for extractive industries. The basis for business to provide funds is the investors’ expectations and confidence of the resources / reserve potential to provide a return on investment and asset growth. In order for investors to make a balanced judgement, a designated Competent Person is to undertake accurate and credible reporting of the resources and reserves.

A Competent Person Indonesia (CPI / CP) is defined as having an adequate educational background, at least 5 years relevant experience, assume professional responsibility and liability for the report, be a member of a suitable professional organization (IAGI / PERHAPI) and vetted through a verification process. The CPI must comply with the code of ethics issued by the appropriate professional organization.

Director General of Coal and Mineral, Ministry of Energy and Mineral Resources Republic of Indonesia, in his decree No. 569DJB / 2015 requires that since April 2017, the reporting of exploration results, resources and mineral reserves shall refer to the KCMI Code and be signed by a CPI.

Exploration Monitoring System (EMS).

In 2017, Minerba found difficulties in trying to manage/ reconcile quarterly & annual reports for more than 6,000 IUP’s, all of which had directors and commissioners. Only about 35% of such IUP’s were properly registered, and 5% of that 35% had actually submitted reports. The quality of such reports was typically very poor, and lacked a Competent Person (CP) in preparing such reports. In 2017 & 2018 the number of IUP’s was reduced through the C&C program to around 3,000, wherein their submission of reports rose to around 70%, and by the end of 2018 the number of IUP’s was around 2,500 with 80% submitting reports, of which about 60-70% were submitted by Competent Persons.

On the 2 December 2019 the ESDM (Minerba) undertook the launching of three new computer systems to record the mineral and coal industries activities of commodity sales [Aplikasi Modul Mineral Verifikasi Penjulan – MVP], exploration reporting [Exploration Monitoring System – EMS] and submitting of exploration data [Exploration Data Warehouse – EDW] for minerals and coal. These digital data systems shall help the Mines Department coordinate and 1) manage the exploration and mining tenement areas, 2) direct efforts towards reserve replacement ratio, and 3) monitor greenfield and brownfield exploration budget activity. Some parts of the system are open to the public, while other parts are restricted, based on the level of government echelon, or for approved requests for information. The EMS & EDW systems relies upon the companies nominated Competent Persons (registered with the system) to enter data, rather than a director.

There are clear criteria for such a Competent Person. This includes the technical aspect of a minimum number of years working in a particular field, along with peer recognition from KCMI. Competent persons registered under KCMI, JORC or SNI all are subject to ongoing scrutiny over their technical and ethical performance, and may be sanctioned by their professional associations for impropriety. 

Conclusion.

The established Indonesian system appoints reporting responsibilities to the director of companies. The various government systems of checks and controls, along with whistle blowers and investigating journalists sometimes find directors with poor training or bad intentions.  The ESDM is applying various means to improve their monitoring of directors, though the ability to cross check 2,400 IUP companies’ directors and commissioners, CEO’s etc through the Beneficial Ownership and other programs seems daunting.

The new Exploration Monitoring System (EMS) is an industry breakthrough, in that the Competent Person is now responsible to submit reports to some government bodies, rather than the director. Such exploration reports may become open to the public, wherein directors may no longer be able to hide or manipulate exploration technical reports. This EMS represents a significant shift towards the global norms where technical reports for public release are signed off by a recognized Competent Person.