Replace Lippo management

Replace Lippo management

Arya B. Gaduh, Department of Economics Centre for Strategic and
International Studies (CSIS), Jakarta, abgaduh@csis.or.id

The past two months have seen Lippo Bank, once again, become
that annoying pebble in the shoes of the Indonesian Bank
Restructuring Agency (IBRA). With huge divestment
responsibilities ahead, and a deadline for IBRA that is
approaching fast, the Lippo case threatens more than just IBRA's
2003 financial target for bank restructuring. It threatens the
credibility of IBRA as an institution responsible to improve the
healthiness of the banking sector, as well as the credibility of
Indonesia's financial institutions. As such, IBRA, as a majority
shareholder in Lippo Bank, needs to take swift action to replace
the bank's management.

Here is a summary of what happened. Lippo Bank's management is
accused of deliberately lowering the value of its own shares to
allow its old owner, under Lippo Group, to regain control of the
bank at a discounted price. The means used included a pair of
different financial statements -- one showing a profit, the other
a loss -- and the alleged collaboration with Lippo Group's
affiliated brokers to systematically lower the bank's share price
starting in November 2002.

With the share price at its lowest at the end of December, the
second financial statement -- declaring a sudden decline in the
bank's capital adequacy ratio (CAR) -- was used to justify a
rights issue in early January that would increase Lippo Group's
share in the bank.

Who is to blame for the incident? Mainly the government and
IBRA.

The real essence of the problem does not lie in the double
financial reports, or in the stock market manipulations of late
last year. The essence of the problem lies in the government's
decision to return the management of the bank to a team that does
not share the government's (or IBRA's) objectives -- namely, to
maximize the return from the sales of Lippo Bank.

Once this decision was made, what has happened over these past
two months -- or, in fact, two years -- was simply an inevitable
turn of events.

Consider this: Mochtar Riady, the previous owner who has
admitted a desire to buy back the bank, was appointed by IBRA to
be its president commissioner. Half of the commissioners were
affiliated to the previous owner, with another half from the
government. Most of the directors come from the Lippo Group, with
IGM Mantera, a former CEO of Multipolar, Lippo Group's
information technology subsidiary, as the bank's current CEO.

So despite IBRA's majority share in the bank, whose interest
would the management represent? The answer seems clear enough.

In fact, this in itself would not be a problem if only Lippo
Group's interest was parallel to IBRA's. In this case, however,
they are on opposite sides. Lippo Group (read: Mochtar Riady),
who is not among those barred from buying banks, wanted to buy
the bank cheaply, while IBRA wanted to maximize its income from
bank sales.

Should there be any doubt that the management will do whatever
it takes to achieve Lippo Group's, and not IBRA's, interest?

Hold on. A skeptic would point out that the government has its
own representatives among the commissioners. They would be able
to monitor the operations of the bank. That is true, if the
commissioners understand bank management. In this case, however,
it doesn't seem that they do.

Consider a comment made by one of them, who said that the
mistake of putting the word "audited" in an unaudited financial
statement published in the mass media was not fatal (Kompas, Feb.
21). Moreover, these government "commissioners" do not take their
commissioning jobs as full-time occupation, and most have other
responsibilities elsewhere.

IBRA should have hence realized that sooner or later, Lippo's
management would have done what it has already done -- it was
simply a matter of time. Once these problems occur -- such as
when it refused to return the excess recapitalization funds to
the government last year -- an appropriate and immediate damage
control measure would be to replace the whole of Lippo's
management with a professional management team appointed by IBRA
that represents IBRA's (and the government's) interests.

Interestingly enough, though, while IBRA has been threatening
to replace Lippo's management since Jan. 20 (Bisnis Indonesia,
Jan. 21), nothing of the sort has materialized. At present, IBRA
is awaiting the Capital Market Supervisory Agency's (Bapepam)
review of the market manipulation accusations before it does
anything.

There is no point in this -- the sharp decline in the value of
the bank's assets -- most of which are properties whose market
performance was actually improving last year -- suggests that the
bank has been managed poorly. Yet there has been a perpetual
delay in IBRA's decision to take a firm stand against Lippo's
management.

All of these delays are harmful, both to IBRA's reputation,
and to the government's chance of getting the maximum return from
the recapitalization money it has invested in these banks. More
delays will attract more questions. After all, it's clear that
the current management has an interest that is contrary to IBRA's
-- why keep hidden enemies to manage your account? And if IBRA
needs a precedent, there was one established in Bank
International Indonesia.

So IBRA, what are you waiting for?