Commissioners' accountability

Commissioners' accountability

The controversy over the two substantially different audited
financial reports of publicly listed Bank Lippo for the third
quarter of 2002 is once again raising big questions about the
government's practice of using positions on the boards of
commissioners of state companies primarily as an additional
source of income for senior officials.

Bank Lippo, which is 60 percent owned by the government, could
not have made such a big mistake if the bank's commissioners had
taken their responsibilities seriously and properly supervised
the management.

Issuing an audited financial report in November with Rp 98
billion in net income, but then publicizing another audited
report for the same period in December with Rp 1.3 trillion in
net losses in its books, as Bank Lippo did, was truly a massive
failure in corporate governance.

Disseminating misleading information on a publicly traded
company, let alone a bank with fiduciary responsibility, is a
crime because financial reporting has a major effect on the way
the economic game is played and is also the cornerstone on which
the market discipline rests.

It is precisely because high quality financial reporting is so
essential for the efficiency and stability of the financial
market that publicly traded companies, especially banks, have
been subject to tough disclosure requirements.

As it so happens, the government's representatives on Bank
Lippo's board of commissioners are among the busiest officials in
town. Syafruddin Tumenggung is the chairman of the Indonesian
Bank Restructuring Agency (IBRA), one of the most important
instruments in managing the economic crisis. He has been
preoccupied with massive loan restructuring and asset disposals
ahead of the end of IBRA's mandate next February.

Anggito Abimayu, a special assistant to the finance minister,
and Hadiah Herawati, an assistant to the chief economics
minister, are unquestionably highly capable persons in financial
matters, but they have been similarly overloaded with job
assignments from their respective bosses, who also happen to be
the busiest members of the Cabinet.

Why were these super busy officials still on Bank Lippo's
board of commissioners? Has the stock of capable and honest
financial experts run so low?

We think the level of compensation awarded to company
commissioners is high enough to attract many highly competent and
honest professionals from the private sector to fill the
positions.

One cannot help but see the additional assignment of busy
officials to the boards of commissioners of state companies
mainly as a means of giving low paid, yet highly capable and
dedicated, officials an additional source of income. This
practice has been going on since the late 1960s.

There are many other officials from the finance ministry, the
office of the chief economics minister and IBRA who sit on the
boards of commissioners of state companies. The officials are
highly capable professionals who actually deserve compensation
that is 10 to 20 times their official pay standard. But their
ministerial bosses are not able to discriminately raise their pay
levels above the compensation standard for the civil service.

But such casual manners in treating positions on the board of
commissioners could endanger the company as the management
virtually has a blank check to run things without proper
oversight. And the consequences could be quite devastating,
especially if the company is a bank like Bank Lippo, which raises
funds from the public, is listed on the Jakarta Stock Exchange
and is partly owned by the investing public.

Companies Act No.1/1995 accords the board of commissioners a
very important function and role, stipulating that commissioners
shall supervise the management (board of directors) to ensure
that the directors are held to strict codes of conduct and that
commissioners shall execute their jobs with a high sense of
goodwill and responsibility for the company's best interests.

But how could the three government commissioners at Bank Lippo
perform well when they had been so overwhelmingly preoccupied
with their primary jobs? How could they have possibly detected
and prevented fraud or other wrongdoings at Bank Lippo?

We should allow investigations by the stock market watchdog,
Bank Indonesia and IBRA, as the nominee government shareholders,
to ascertain as to whether there had been a criminal conspiracy
or collusive deals behind the two substantially different audited
financial reports.

But even without criminal intent, such a massive failure in
corporate governance as the one that took place at Bank Lippo
could recur or take place at other state ccompanies if the
government continues to use positions on the boards of
commissioners mainly as additional sources of income for its low
paid officials.