Strikes in state firms and foreign investors

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.