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?