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CSR law in Indonesia
by Erin Lyon  elyon@csr-asia.com
24 Jul 2007
 As you can see from the image of the Jakarta Post on Friday 20 July, CSR has made the front page in Indonesia. At the centre of the debate is the move by the Indonesian government to include CSR as a mandatory requirement in its latest revision to company law (RUU PT). The Indonesian government has been talking about making CSR a legal requirement for a number of months now and last week the government released a draft law for comment. The government was initially looking at revising company law to include making CSR mandatory for all limited liability companies. The first draft of Article 74 of the new company law was summarised as follows: (translation by Indonesian Business Links)

  1. A limited liability company is obligated to conduct corporate social and environmental responsibility;
  2. Corporate social and environmental responsibility is an obligation for limited liability company, which is budgeted and calculated as cost or expense for limited liability company;
  3. A limited liability company that does not carry out the said obligation shall be sanctioned according to regulations.

 This draft published by the government met with strong opposition from a number of business groups, including those in Indonesia that have been promoting CSR. They included: Indonesia Business Links, the Indonesian Institute of Accountants – Management Accountants Compartment, the Indonesian Chamber of Commerce, the National Committee on Governance, and many industry bodies such as those from the mining industry, tea industry and cosmetics to name but a few. The grouping listed above issued a statement (which they have provided in translation) which is documented below at the end of this article.

 Following the opposition to the draft law, it was reported that the government was amending the law to only include companies involved in ‘the exploitation of natural resources’. It was also stated that ‘the actual figures on the amount of funding that would have to be devoted to CSR, and the sanctions for non-compliance, these issues would be provided for in the new legislation's ancillary regulations’. To date it is still unclear when the ancillary regulations will be announced.

 On the afternoon of Friday 20 July it was then announced that the amendments to the company law had been passed. A statement was issued which was subsequently covered in the Jakarta Post that read ‘Article 74 of the law provides that a company that operates in any business field related to natural resources is required to institute social and environmental responsibility programs, and that sanctions will be imposed on non-compliant firms. The article not only affects natural resource-based companies, such as mining, oil and gas, and plantation firms, as the commentary accompanying the legislation states that other firms that do not exploit natural resources but affect the environment must also conduct CSR programs.

 This means that all businesses outside the financial sector may be required to conduct CSR programs.’ In summary, Indonesian company law states that companies with an impact on natural resources must implement CSR which is to be budgeted for as a cost. Beyond that we await further regulations – both to define CSR in this context and to determine how it should be implemented and to clarify which companies are actually affected. Currently the law applies to companies ‘engaged in natural resources or those in business in connection with natural resources’, but it isn’t clear what is covered by the term ‘natural resources’. There are also concerns about how any ‘CSR fund’ will be administered, with many expressing fears that it will be a new avenue for corruption. We also await further regulations on how this law will relate to existing legislation – for example environmental laws and how sanctions will work.

 It is part of global trend that governments are looking to legislate for CSR, which I would argue is both inevitable and necessary. The question is has Indonesia, as the first country to legislate, got it right? Until we see the further regulations we just don’t know. There are those (as detailed above) who are concerned that, in effect, what Indonesia has ended up with is a CSR tax. Opponents to CSR point to the ‘CSR law’ as yet another regulation that will deter foreign investors from committing funds to projects in Indonesia, although it could be argued that done correctly it could open the door to new SRI funds. Proponents of CSR are pointing out that this is merely legislative philanthropy. We can only hope that the further regulations provide the necessary guidance that makes it clear that the regulations require strategic CSR. Without wishing to sound too repetitive or to over simplify the issue - CSR is about how you make money of, not how you spend it (or in this case not how you spend a designated proportion).

 Perhaps what is most alarming from the current discussions is the statement that the financial sector is specifically excluded from any law on CSR. For me this is the biggest indicator that perhaps this law is not about CSR but is simply mandating philanthropy. The financial sector has a key role to play in CSR, to manage funds in a responsible manner and to loan new capital only to those companies who can demonstrate a commitment to environmental, social and governance issues. To specifically exclude this entire industry is to miss the point entirely.

 We await further clarification on this new law which the government has promised in the form of a government ancilliary regulation (PP). CSR Asia will follow this issue closely.

Statement released from Indonesian Business Links et al.
  1. Regulating CSR is a diversion of good governance and is not a best practice.,
    Not a single country in the world has a legislation that mandates limited liability company to conduct CSR. [CSR Asia note: Some countries have legislation on CSR Reporting (e.g. France and Malaysia) and the UK concept of ‘enlightended shareholder value’ which is included in the Companies Act 2006 will come into force October 2007].
  2. The RUU PT seems to not have the actual understanding of CSR and contradicts with CSR practices that are globally implemented by the business sector.
    The RUU PT seems to formulate CSR in a very narrow understanding, which considers CSR as a philanthropic activity, whereas CSR covers a far wider remit than just philanthropic activities. CSR include corporate responsibilities toward the stakeholders, including the environment, employees, suppliers, customers or clients and the general public, even the future generation. CSR also includes responsiblity in issues related to products, advertising, transportation, business ethics and human rights.
  3. CSR regulation is a reactive policy.
    The absence of a comprehensive argumentation that is provided in the form of an Academic Paper, which is consulted to the stakeholders, indicates that this RUU is a policy that is not participative, reactive and not based on thorough consideration by taking in prevailing views and practices, whether international or those that have been recently developed in Indonesia. The only argumentation that is available is the regulation on CSR obligation for investors, which is already set forth in Law No. 25/2007 on Investment. The argumentation however does not clarify as to why the CSR obligation is broaden to limited liability companies that run whatever type of business.
  4. CSR regulation is counterproductive to the promotion of CSR concept and practice.
    To date, CSR in Indonesia is still in the socialization phase or the business sector’s awareness is being increased to implement the CSR concept, whereas it is already rapidly growing in developed countries. By regulating CSR, it will inhibit the effort to promote and socialize CSR in Indonesia, since it is opposite to the global CSR concept.
  5. CSR regulation is a highly uncommon concept.
    If the regulation on the CSR obligation within the RUU PT, which is being reviewed in DPR, is enacted, Indonesia will then be the only country that mandates or obligates CSR, while in any country in the world CSR is not an obligation. Each company is voluntarily responsible to carry out positive actions in the areas of economy, social, and environment to the stakeholders beyond that has been set forth in the legislation.
  6. CSR regulation is counterproductive to the agenda for revising the Income Tax Law (UU PPh) aimed to increase competitiveness.
    The regulation that obligates limited liability company to allocate budget to implement CSR implicates additional burden for the business sector. This obligation is equal to taxes that is obligatory and enforced. This is similar to additional tax on the Income Tax or Pajak Penghasilan (PPh) that is levied from the net profit of a limited liability company. This obligation is also not in line with the direction and purpose of the plan to revise UU PPh as to increase competitiveness with other countries, which is by among others simplifying and reducing tax rate. What is then the purpose of the government to reduce the income tax, while it is accompanied with an increase or additional burden for business sector?
  7. CSR regulation require specific and expensive infrastructure and bureaucracy
    The Government needs a special system, procedure and bureaucracy to implement, control, monitor and supervise the implementation of this legislation, which must be carried out by millions of limited liability companies, wherever they are in Indonesia, whatever type of businesses they run.

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