The Abolition of Independent Directors in Indonesia: Rationally Autochthonous or Foolishly Idiosyncratic?

This Article examines Indonesia’s unprecedented 2018 decision to abolish the requirement for independent directors on the boards of its listed companies, a move that contradicts global corporate law and governance norms. Our empirical analysis of annual reports revealed that by 2023 there was not a single reported independent director in Indonesia’s 20 largest listed companies. This conspicuous departure from global corporate law and governance norms reflects a pivot towards reliance on independent commissioners within Indonesia’s ostensibly “two-tier board” system, to align with Indonesia’s unique civil law traditions. It also represents Indonesia’s desire to reassert its regulatory autonomy in the wake of the International Monetary Fund’s imposition of the Anglo-American concept of independent directors as a conditionality for its economic lifeline to Indonesia in the wake of the 1997 Asian Financial Crisis.

Based on empirical evidence, in-depth interviews, and legal analysis, we argue that while Indonesia’s abolition of independent directors has some tenuous theoretical validity, it presents significant corporate governance risks. Independent commissioners provide only a partial substitute for independent directors, with their effectiveness potentially compromised by controlling shareholders’ influence, limited legal authority, and potential pressure from corrupt government practices. Moreover, our hand collected data on political connections between independent commissioners and the government raises concerns about their true independence, particularly in state-owned enterprises.

Drawing on our findings, we propose bespoke reforms tailored to Indonesia’s controlling shareholder dominated context, which is defined by powerful state-owned enterprises and family firms in a system plagued by corruption. The aim of our reforms is to transform  Indonesia’s independent commissioner system into an effective autochthonous corporate governance mechanism so that it can realize its enormous potential as the world’s fourth most populous country and seventh largest economy. We conclude by situating Indonesia’s approach within the broader evolution of corporate law and governance globally, suggesting that as regionalization supplants globalization, this departure from Anglo-American-cum-global “good” corporate governance norms may signal a shift towards more localized governance solutions in an increasingly multipolar global economy.