Bank Bali imbroglio

The decision by Indonesian Bank Restructuring Agency (IBRA) chairman Glenn Yusuf last week to review the agency's management and investment agreements with Standard Chartered Bank (SCB) of Britain for Bank Bali, though rather late, is imperative to resolving the imbroglio between Bank Bali local staff and SCB management team.

The protracted hostility of local staff toward SCB may dampen the future entry of foreign bankers who are needed to introduce an international culture into domestic banks. The dispute may also discourage foreign investors, who are expected to play a key role in helping the country's economic recovery.

That many Bank Bali staff members have staged nearly daily protests against the SCB-led management and initiated a campaign of noncooperation with the management since October, braving the risk of dismissal at a time when thousands of bank employees have been made redundant amid the banking crisis shows that the SCB management team has failed to execute its basic function -- managing people.

The local staff's complaints about the alleged hiring by SCB of an excessive number of expatriates and the hefty expenses subsequently incurred by the foreign staff should be verified against Bank Bali's financial performance since the bank's management was taken over by the British bank in late July. Investigations are also warranted to ascertain as to whether there is any evidence supporting SCB's suspicions that former owners and other shareholders of Bank Bali were engaged in underhanded maneuverings to engineer the local staff protests to force SCB to drop its option to buy 20 percent of the bank.

True, Bank Bali's problems have been exacerbated by the disclosure, only two days after its management was taken over by SCB, of its questionable transfer of Rp 546 billion in commission to PT Era Giat Prima under what is now notoriously known as the politically charged Bank Bali scandal.

But the local staff's allegations that Bank Bali's financial condition is now much worse than it was in late July and that the remuneration and expenses of the 60-member management team brought in by SCB almost equals the combined salary of the bank's 6,300 local staff are quite damaging.

In fact, perusing the IBRA-SCB management contract for Bank Bali, one should be surprised by the virtual blank check granted to the UK bank in managing Bank Bali. The three-year contract does not stipulate any parameter to assess SCB performance but grants SCB unlimited authority to appoint the majority of directors and supervisors and all senior nonboard management without any specified limitations on their remuneration and expenses.

Most surprising is the stipulation that IBRA and Bank Bali are obliged to indemnify SCB against any and all losses, costs, expenses, claims and other liabilities incurred in connection with its operational management of Bank Bali. In case of termination of the management contract by IBRA prior to the expiry of its three-year term, SCB is entitled to an early termination fee of US$25 million. Even if the agreement is terminated by SCB before the expiry date, SCB is still entitled to $2.5 million in compensation.

Since SCB does not face any risks and will continue to get its management fee irrespective of whether Bank Bali loses money or not, there seems no incentive at all for SCB to control its expenses in the provision of management services to Bank Bali. Since SCB has no stake in Bank Bali and is instead competing with it for corporate and private banking customers, it appears that the UK bank faces a conflict of interest, especially because it can at anytime waiver its option to buy 20 percent of Bank Bali.

The restlessness of Bank Bali local staff, the disadvantages of the contract for IBRA and SCB's apparent conflict of interest in its management of Bank Bali are all imperative reasons for a review of the management contract.