Independence of the Supervisory Board in Banks: A Comparative Analysis of Indonesian and Malaysian Law

Abstract

The independence of board members play a crucial role in establishing good corporate governance. This is especially important for banks compared to companies in non-financial industries as they play a key role in the nation's economy. Malaysian corporate governance carries a reputation of effective legal framework and enforcement system amongst ASEAN member states. The report by ACGA shows that Malaysian banks implement better corporate governance than banks in Indonesia. This paper seeks to find the adequacy of Indonesia’s regulation on the supervisory board independence in banks to ensure good corporate governance compared to the regulation in Malaysia.  Findings to this research show that Malaysian law on independent board members are much more stringent than the requirements in Indonesia. The study also finds that the fundamental structure of the company board model (Indonesia adopts the two-tier model and Malaysia adopts the one-tier model) affects how supervision is upheld and the placement of independent board members within the company. Malaysian legal framework ensures a majority of independent members at both supervisory and managerial function, whereas Indonesian legal framework emphasizes the need for independence only at the supervisory function.