In the past few years, Southeast Asian countries have experienced an influx of foreign investment and companies are now contending with increased challenges to the way they manage and govern their companies. This is now highlighted in a battle between one of Indonesia’s most powerful families, the Bakries, and Nathaniel Rothschild over one of Indonesia’s largest coal mining companies.

In July 2010, Nathaniel Rothschild’s NR Investments and the Bakrie Group created the London-listed Bumi plc as an investor to the Jakarta-listed Bumi Resources. At the time, the deal to back Bumi Resources was logical given that Bumi Resources is one of the largest companies in Indonesia’s coal industry. Currently, Bumi plc owns 29.2% of Bumi Resources and 84.7% of major Indonesian coal miner, PT Berau Coal Energy.

Now, the marriage appears over following alleged shareholder rights abuses in conjunction with allegations of financial improprieties at Bumi Resources, which, according to Bloomberg, amounted to a “net loss of $632.5 million in the nine months to Sept. 30 after a $422 million charge on ‘derivatives transactions’, when compared to a ‘profit of $175.5 million a year earlier.’” Because of the significant financial losses which led to an 80% drop in Bumi’s share price, Rothschild is determined to use a February Extraordinary General Meeting of Shareholders (“EGM”) as the arena to engage in a proxy fight over the Bakries’ leadership and influence in Bumi.

The major issue at the heart of the matter is corporate governance. For instance, the Asia Times reports that Mr. Rothschild had vocalized his concerns “about the state of Bumi’s Bakrie-related finances. The ensuing boardroom battle led to Rothschild’s ouster as co-chairman of Bumi.” Despite his allegations, upon his resignation from the board in October, he was replaced by Bakrie ally and tycoon Samin Tan, who “paid the Bakries $1 billion for half of their Bumi

[plc] stake.” To this point, Mr. Rothschild has not only questioned the board’s independence, but suggested that “the board had ‘failed in its duties to minority shareholders’.” Furthermore, he has supposed that the board failed to appropriately act on the findings of a report regarding alleged financial irregularities at its Indonesian businesses.

As part of his proxy fight, Rothschild will seek the exit of the Bakrie family, but only in a way that preserves the entities, and “so long as all other major Indonesian shareholders with ties to the family exited as well.” Although he seeks to retain the investment in PT Berau Coal Energy, a new board is being proposed which will replace 12 of the 14 board members, including the Chairman, Samin Tan. As part of the process, the new board would incorporate a new Corporate Governance and Ethics Committee, and “make public as soon as possible the interim findings…into alleged financial irregularities at Bumi Resources. The consortium added that the new board would use Bumi Plc’s 29.2% stake in Bumi Resources to seek any additional information and even call a shareholder meeting at the Indonesian company if needed in order to push for change there.”

This episode is illustrative of the challenges facing Indonesian companies as they seek to integrate themselves into the global economy. In exchange for greater investment, a market that has been typified by lax corporate governance standards is awaking to reality that bettered standards are necessary in order to sustain the foreign investment which drives continuing economic growth. For many Indonesian firms, especially those owned by magnate families, they must come to realize that challenges to Indonesian corporate governance practices, as exemplified by Mr. Rothschild, should not be seen an isolated event, especially when other Southeast Asian countries are working to improve their corporate governance standards.