The issue of directors’ liability has once again come under intense scrutiny recently. A number of cases involving losses at state-owned enterprises (SOEs) and other business disputes have raised a classic yet ever-relevant question: Does every business decision that results in a loss automatically make the board of directors liable? The Business Judgment Rule (BJR) exists to answer that question, but its application in Indonesia still leaves many gray areas.
When Business Decisions Turn Into Criminal Charges
In running a business, the board of directors and the board of commissioners are often faced with high-risk strategic decisions. Even decisions made in good faith frequently result in financial losses for the company. The problem is that in Indonesia, there is still no uniform understanding among law enforcement officials regarding how the BJR doctrine should be applied—with the result that mere business losses are often treated as criminal matters, even though the two are philosophically distinct.
A recent article on Hukumonline underscores an important principle: fair law does not judge what happens after a decision has failed (ex post), but rather examines whether the decision was legally justifiable at the time it was made (ex ante). This perspective lies at the heart of the BJR doctrine.
What Is the Business Judgment Rule?
The Business Judgment Rule is a doctrine that originated in the common law system, rooted in the concept of fiduciary duty—that is, the directors’ responsibility to the company they lead. The essence is simple: directors cannot be held personally liable for business decisions that result in losses, provided that such decisions are made in good faith, with proper purpose and method, based on rational considerations, and with adequate care.
The philosophy behind it is closely tied to the realities of the business world: high risk, high return. The greater the risk taken, the greater the potential profit a company can earn. Without protections like the BJR, each director could potentially be held personally liable for any business losses that arise—without adequate grounds for defense. If this situation is allowed to continue, it is not unlikely that no directors will dare to make strategic decisions, thereby hindering the company’s growth and even the broader economic progress.
Legal Basis in Indonesia
Although it originates from the common law tradition, the principle of BJR has in fact been incorporated into the Indonesian corporate legal framework, particularly Law No. 40 of 2007 on Limited Liability Companies (the LLC Law). Article 97(3) of the Limited Liability Companies Act states that members of the board of directors are fully and personally liable for the company’s losses if they are at fault or negligent in performing their duties. Conversely, this provision also serves as the basis for the argument that if a director is not at fault or negligent—because they have acted in accordance with the principles of prudence and good faith—then such personal liability should not apply.
For issuers and public companies, similar protections are also explicitly stipulated in the Financial Services Authority Regulation (POJK), which states that members of the board of directors cannot be held liable for losses incurred by the issuer or public company if they can prove that certain conditions have been met—in line with the characteristics of BJR in various other countries.
Cumulative Requirements for the Implementation of BJR
According to a number of corporate law scholars, there are at least five elements that must be cumulatively satisfied in order for the board of directors to invoke the BJR doctrine:
Good faith— the decision was made without any malicious intent or in violation of the law.
Fiduciary duty— Decisions should be made with the company’s best interests in mind, not those of any other party.
Informed basis— The decision was based on the information and data available at the time.
Duty of care— done with care, not haphazardly or carelessly.
Loyalty— is not based on personal interests or conflicts of interest.
These five elements serve as a sort of "checklist"which the board of directors should ideally fulfill before making a risky decision, and which also serves as a criterion for judges or shareholders to assess whether a decision warrants protection under the BJR or not.
Limits of Protection: BJR Is Not an Unlimited Shield
It is important to emphasize that BJR is by no means a form of impunity for directors. This protection has clear limits and does not apply under certain circumstances:
Illegal or criminal acts (illegality)— The BJR was never intended to protect unlawful acts.
Fraudulent transactions— Decisions that involve deception are clearly outside the scope of the BJR.
Actions beyond one’s authority (ultra vires)— for example, corporate actions that require approval by the General Meeting of Shareholders or the Board of Commissioners but are simply ignored.
Conflict of interest— when a decision benefits the board members personally, rather than the company’s interests.
Intent or gross negligence— As stated by the Chair of the Tax Oversight Committee, the board of directors must not commit any intentional errors; all decisions must be shown to have been made with due care and in the best interests of the company they manage, not those of any other party.
In other words, the BJR serves as a safeguard to prevent law enforcement officials and the courts from arbitrarily taking over business decisions that are not within their purview to assess—not as a loophole for unscrupulous board members to evade responsibility.
Accountability Mechanisms: From the Annual General Meeting to Court Litigation
In Indonesian corporate law practice, the assessment of whether the BJR principle has been met typically begins with an internal mechanism: the board of directors’ accountability before the General Meeting of Shareholders (GMS). If that accountability is accepted, management is released from liability on behalf of the company (acquit et decharge or release and discharge), including for any losses the company may have incurred.
However, if liability is denied, further legal avenues remain open. Article 97(6) of the Limited Liability Companies Act allows shareholders representing at least one-tenth of the voting shares to file a lawsuit in District Court against directors deemed to be at fault or negligent. Even in a scenario where the majority shareholders have accepted the board of directors’ liability, minority shareholders who disagree may still file a separate lawsuit in court.
Why This Issue Is Becoming Increasingly Urgent, Especially for State-Owned Enterprises
The urgency of understanding the BJR has grown in recent times, particularly regarding the management of State-Owned Enterprises (SOEs). SOEs bear a dual responsibility that is no light matter: as agents of development that provide goods and services to meet the basic needs of the public, and simultaneously as business entities required to generate profits and contribute dividends to the state. The tension between these two roles makes business decisions at SOEs prone to being drawn into the criminal realm when they result in losses, even though such decisions may have been made in accordance with the principle of prudence and in the company’s best interests at the time.
For this reason, an increasing number of academics, legal practitioners, and public policy watchdogs are urging law enforcement officials to fully internalize the BJR doctrine in every investigation of cases involving corporate losses, rather than jumping to the conclusion that a criminal offense has occurred merely because a company has suffered losses.
Note: This article is intended for editorial and general educational purposes and is not intended to serve as a legal opinion regarding a specific case. For application to a specific situation, we recommend consulting an attorney through our website.
