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Friday, 25 Aug 2017

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Of late Corporate Governance has become a more and more droned buzzword. Many people ask, how one can know whether a company has implemented well the principles of Corporate Governance. It seems that it is not difficult for a company to state that they already adhere to the basic principles of Corporate Governance, reflecting the principles of transparency, responsibility, accountability, and fairness. However, an evaluation or a systematic assessment must be made to make sure that a company has already really implemented Corporate Governance.

For that, there are actually already some tools, which can be used by companies for self assessment, to know whether the Corporate Governance of a company is already well implemented. One of the tools for said self assessment has been developed by FCGI (Forum for Corporate Governance in Indonesia). This tool is in the form of a set of questionnaires which can be completed by the companies themselves and furthermore the companies give an evaluation or scores objectively towards those replies.

Through mentioned questionnaire, companies can make an evaluation or assessment at some sections of Corporate Governance, where at said respective sections has been put weight. In mentioned FCGI questionnaire, weight has been put at 5 sections, being:
1. Shareholders rights (20%)
2. Corporate Governance policy (15%)
3. Corporate Governance practices (30%)
4. Disclosure (20%)
5. Audit (15%)

1. Shareholders rights (20%)
Let us see at the samples of items that are included in the scope of the respective sections. In the shareholders rights, for instance, we can give an evaluation, whether the company:

  1. has held the Annual General Meeting of Shareholders (GmoS) within the period of 6 months after the accounting year end, in accordance with chapter 65 paragraph 2 of the Indonesian company law (UUPT);

  2. has submitted to the shareholders the notification regarding the Annual 
    Meeting of Shareholders at least 28 days before GMoS is held;

  3. has encouraged the shareholders to attend GMoS and to make use of their voting rights;

  4. has given enough opportunity to the shareholders to put questions at GmoS;

  5. Etc.

Furthermore give scorings, for instance 5 points for each answer "yes" and 0 points for answer "No". So for instance of the 10 questions in the section of said shareholders rights, the company is answering 6 times "yes" and answering 4 times "no", for this section the company will obtain the score of (6 X 5) + (4 X 0) = 30 (of the maximum score of 50 or 10 X 5).

2. Corporate Governance policy (15%)
Above said assessment is also to be done for other sections. For instance in the sector of Corporate Governance policy, the company can appraise themselves whether they:

  1. have a written code of corporate governance wherein clearly explains the rights of the shareholders, the duties and responsibility of the Board of Directors and Board of Commissioners;

  2. make available access for the public to know the company's policy regarding public investors;

  3. have set up an organ responsible (for instance the Board of Commissioners) to ascertain that the company adheres to the code of Corporate Governance;

  4. have a written code of conduct/ethics for the employees;

  5. have a written code of conduct/ethics informed and implemented well;

  6. Etc.

3. Corporate Governance practices (30%)
In the section of Corporate Governance practices, can be examined whether in the company:

  1. the Board of Directors is holding periodical meetings regularly with the Board of Commissioners;

  2. exists a strategic plan and an operational plan giving guidance to the Board of Directors and the Board of Commissioners to execute their task and function;

  3. the Board of Directors and the Board of Commissioners have been given training or have a proper background enabling them to do their assignments;

  4. the members of the Board of Commissioners and of the Board of Directors are disengaged of conflict of interests;

  5. is there a performance appraisal system for the Board of Directors as well as for the Board of Commissioners;

  6. Etc.

4. Disclosure (20%)
In the section Policy and disclosure practices can be appraised whether the company:

  1. has made available the same access for the shareholders and financial analysts;

  2. has given proper explanations about business risks;

  3. has properly disclosed the remuneration to the Board of Directors and the 
    Board of Commissioners;

  4. has disclosed the related party transactions;

  5. has presented the results of the financial performance and the management's analysis through the internet;

  6. Etc.

5. Audit (15%)
In the Audit section, can be appraised whether the company already:

  1. has an effective internal audit

  2. has been audited by an independent public accountant

  3. has an effective audit committee

  4. has developed an effective communication between the internal audit, the external audit and the audit committee

  5. Etc.

Furthermore, like in the section of the rights of the shareholders, in the other sections also can given scores (for instance for each answer "yes" a score of 5 is given, while for each answer "no" a score of 0 is given). From the results of these scorings, is for instance obtained a score for the rights of shareholders = 30 (of a maximum score of 
50), Corporate Governance policy = 45 (of a maximum score of 60), Corporate 
Governance practices = 60 (of a maximum score of 80), disclosure practices = 25 (of a maximum score of 40), audit =30 (of a maximum score of 40). Furthermore to determine the total score the weighted average method is used (with the weights as explained at the beginning of this article). Herewith the total score for said company is:

{(30/50 X 20%) + (45/60 X 15 %) + (60/80 X 30%) + (25/40 X 20%) + (30/40 X 15%)} = 69,5% or score 69,5 of the highest score 100.

With this score of 69,5, does this mean that the Corporate Governance of said company 
is good or bad? The answer is relative, because there is no standard stating what score is good or what score is bad. However, there are two things which must be paid attention to. First, the company has to try to reach the highest score as possible. Second, we have to be cautious in using this Corporate Governance score, in comparing several companies, especially if the characteristics of industry are different. If a company, based on the questionnaire is scoring 69,5 the Corporate Governance is not said to be worse in comparison with another company scoring 75, and also the other way round. In some aspects the Corporate Governance of a company with said score of 75, is maybe better than that with a score of 69,5. But there are maybe some strong points of the Corporate Governance of the company with the 69,5 score, which are not recorded well through said questionnaire. That is because Corporate Governance is actually not something absolute which can be measured exactly or with certainty by using a special tool. Corporate Governance has many dimensions and there is no tool yet able to measure it perfectly. 

We have to be aware that the self assessment method has strong as well as weak points. The strong point of the self assessment method is simple; a company can easily appraise on its own what grade the implementation of corporate governance is, by giving points to each section of the questionnaire and cast it up. While the weak point is that the assessment is not done independently as it is done on its own, and can raise questions whether the assessment is done objectively. As a result it may raise questions from outside the company (even from inside the company itself) whether this self assessment is done objectively and whether the result of this self assessment really reflects the real Corporate Governance condition of the company.

Nevertheless this does not mean that this self assessment has no benefit. The potential for benefit of this self assessment is still great, as long as the assessment is done fairly and objectively. While the use of the result of this self assessment, especially is to help the company to understand its Corporate Governance condition, to identify the still weak sections of the Corporate Governance and to better the still weak sections. 

The self assessment is not meant to convince the public about the company's Corporate Governance condition. If the company's aim is to convince the public about its Corporate Governance, the company can ask for an independent party to do this assessment (like quality certifications at ISO 9000). Mentioned independent party can be a government institution, a public accountant, as well as other parties having competition in the Corporate Governance sector and can do assessments objectively. Given that the most recognized international certification is the International Standards Organization (ISO9000) certification, parallels are often drawn between corporate governance certification and ISO certification. However, there are differences between ISO certification and Corporate Governance certification; ISO certification assures that products are produced by meeting well-defined standards of quality and consistency, Corporate Governance certification is of the tangible systems and processes within a company, certification is against the recognized ISO standards and certification is provided by authorized parties registered with ISO. Therefore, it is not fair to draw parallels between corporate governance certification and ISO certification

FCGI Self Assessment Questionnaire in Microsoft Excel Format download Excel Assesment Test

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Please make sure you understand the usage of Self Assesment by reading the summary for Self Assesment Tools.

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