Strikes in state firms and foreign investors

Suhunan M. Situmorang Corporate Lawyer Jakarta

A new phenomenon in the history of the workers' struggle in Indonesia has arisen. While their demands used to involve wage increases, better welfare, or rejection of lay-offs, today workers are turning their attention to corporate affairs.

This is evidenced by the various acts of protest and opposition waged by workers of state owned enterprises (SOEs) such as PT Semen Andalas, PT Semen Tonasa, PT Semen Gresik, PT Telkom, PT Dirgantara Indonesia and PT Kereta Api Indonesia, and lately, Indosat.

Though found only in companies with state-owned shares, the phenomenon is not to be treated lightly. If the government (as a quasi shareholder) trivializes the complaints or settles cases in a partial way, it will create a negative precedent for future disputes.

While such massive strikes would distort the independence of a limited liability company as a legal entity and disturb corporate performance, the resulted precedent would also hamper the plan for privatization of SOEs -- which has been agreed upon with the International Monetary Fund, and is needed by the government for foreign debt installments.

There are a number of reasons for this concern. First, it would no longer be easy for corporate boards of directors to carry out their policies and corporate actions such as selling assets, executing acquisition-merger or takeovers, selling shares to (particularly foreign) investors, undertaking joint operations or profit-sharing marketing with foreign partners and other ventures.

Business decisions may have to be made for corporate rescue or for increased profit making.

Second, prospective investors or business partners would continue to hesitate to invest their funds because of this uncertainty. Third, the government as shareholder will frequently be thwarted in its authority and freedom to exercise its rights, for instance, to replace board members considered incapable.

The arguments here are not to discredit the struggling SOE workers, but rather to analyze the legal basis of such demands. Based on corporate law (Law no. 1/1995 on limited liability companies), employees have no right and authority to intervene in, approve or reject a decision and policy of the board of directors and shareholders concerning corporate affairs.

Even shareholders are not permitted to interfere with corporate management, except in the appointment or relief of managing directors, or in the case of asset conversion into collateral or asset transfer, and in the appointment of the board of directors/commissioners. If the shareholders general meeting intervenes in corporate affairs, it means that the meeting acts as shadow directors -- a move contradicting corporate law principles.

The organizational structure of limited liability companies according to Indonesian law comprises only three components: The shareholders' general meeting (RUPS), the board of directors and commissioners. Despite the large authority delegated to the board of directors, in practice it is not strong enough in the face of shareholders. This is because the corporate law system in Indonesia -- as in other countries -- grants vast power to shareholders.

On the other hand, workers are not accorded such a privilege by law, unless they are among the shareholders or unless this is enabled by their respective corporate articles of association.

The government has inconsistently subjected limited liability companies to legal principles and provisions. If it was consistent, it should not have unnecessarily intervened in the management of SOEs, including policy making and corporate actions. Nearly all plans and important decisions of SOEs have been finalized by the government itself, leaving company directors to simply toe the line.

Hence the "independence" of limited liability companies is only recognized in concept; but when employees or stakeholders lodge their protests, the government performs the function of directors by taking over and trying to "settle" the case.

It should be the board of directors which explains emerging issues at shareholders' meetings. Whatever decisions are adopted should continue to reflect good corporate judgment, instead of the mere ruling of shareholders. Government interference leads to not only the loss of authority on the part of the board of directors but also its vulnerability to offensives, especially those launched by employees.

If this pattern is maintained and spreads, how would the government proceed with its declared intention to empower SOEs? Will foreign investors be attracted by the privatization of SOEs, while the internal threat to SOEs cannot yet be solved in legal terms?

The government must now change its attitude, notably its paradigm and concept of state control over SOEs. If a state enterprise is a limited liability company, it should consistently be treated according to corporate legislation. Its workers should also be educated on their rights.

Otherwise, all the offers made to foreign investors will not mean much because every time a transaction is about to be negotiated, workers are able -- and likely -- to kill it off.