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The Board of Directors is one of the organs of a company that is fully responsible for managing the company for the benefit and purpose of the company, as well as representing the company both in and out of court, in accordance with the provisions of the Articles of Association, as regulated by Law No. 40 of 2007 concerning Limited Liability Companies. In other cases, the Board of Directors undertakes a Fiduciary Duty. The Business Judgment Rule (BJR) is a legal doctrine within corporate law that provides protection to the board of directors, exempting them from liability for losses resulting from actions taken in good faith and with due care. According to Black’s Law Dictionary, the business judgment rule is defined as the presumption that when making business decisions, corporate directors act with honesty and in the belief that their actions are in the best interest of the corporation, without involving self-interest or self-dealing.

Thus, this concept grants immunity to the Board of Directors, shielding them from being held accountable, even if the decisions made are detrimental to the company. This concept is often seen as providing protection to the Board of Directors in making business decisions based on the principles of Due Care & Diligence. However, the Business Judgment Rule does not absolve the directors of responsibility if there are indications of abuse of power or corruption. The errors made by the board of directors in decision-making, which can be held accountable, are explained in Munir Fuady's book Modern Doctrines in Corporate Law and Their Existence in Indonesian Law as follows:

1. Contrary to the Principles of Fiduciary Duty : This includes situations where there is a conflict of interest.
2. Contrary to the Principle of Due Care : This includes instances where there is intentional misconduct or negligence.
3. Contrary to the Principle of Prudence : This refers to decisions that lack careful consideration or foresight.
4. Contrary to the Principle of Good Faith : This includes actions taken without honesty or integrity.
5. Contrary to the Principle of Proper Business Purpose : This refers to actions taken for purposes that are not in the best interest of the company.
6. Errors due to Incompetence of the Board of Directors : This refers to situations where the Board of Directors lacks the necessary skills or knowledge to make sound decisions.
7. Violation of Applicable Laws and Regulations : This includes any breach of legal requirements or regulatory frameworks.
8. Errors Due to Insufficient Information : This occurs when decisions are made without access to adequate or relevant information.
9. Hasty Actions in Decision-Making : This refers to decisions made too quickly without proper deliberation.
10. Errors Due to Decisions Made Without Investigation and Rational Consideration : This occurs when decisions are taken without sufficient investigation or without considering all relevant facts and evidence.

Legal Grounds for Lawsuits Against Faulty Business Decisions :

“The court is not permitted to substitute its own judgment for the business decisions made by the Board of Directors.”

However, the court may still assess any decision made by the Board of Directors—including business decisions that have been approved by the General Meeting of Shareholders (GMS)—to determine whether such decisions comply with applicable laws. Nevertheless, the court is not authorized to assess the appropriateness of the decision from a business policy or judgment perspective.

The court may still review any decision made by the Board of Directors—including business decisions that have been approved by the General Meeting of Shareholders (GMS)—for the purpose of determining whether such decisions comply with applicable laws. However, the court is not authorized to assess the appropriateness of those decisions based on business judgment or discretion.

Nevertheless, such liability is not automatically imposed on every member of the Board of Directors simply by virtue of their position or every decision they make. The directors themselves are obligated to fulfill the requirements under the Business Judgment Rule, which include the following:

1. The decision is made for a proper purpose;
2. The decision is based on a rational foundation;
3. The decision is made with due care;
4. The decision is made by a person acting with the level of prudence expected of someone in a similar position; and
5. The decision is made with a reasonable belief that it is in the best interest of the company.

The Business Judgment Rule is further regulated under Article 97 paragraph (5) of Law No. 40 of 2007 on Limited Liability Companies, which stipulates that members of the Board of Directors cannot be held liable for losses as referred to in paragraph (3), if they can prove the following:

1. The loss was not caused by their fault or negligence;
2. They managed the company in good faith and with due care, in the interest of and in accordance with the purposes and objectives of the company;
3. They had no direct or indirect conflict of interest in the management actions that resulted in the loss; and
4. They took appropriate actions to prevent the occurrence or continuation of the loss.
5. The exception to the liability of directors, as stipulated in Article 97 paragraph (3), states that each member of the Board of Directors shall be personally liable for losses suffered by the company if it is proven that they are at fault or negligent in carrying out their duties.
6. Furthermore, Article 155 imposes a stricter provision by stating that the liability of Directors or Commissioners for their fault or negligence does not exempt them from criminal liability.
7. The types of errors or mistakes that may be tolerated under the law in relation to the Business Judgment Rule are as follows:
   1. A mere error of judgment in decision-making;
   2. An honest mistake or honest error in judgment;

   3. Losses incurred by the company as a result of employee misconduct, unless it is proven that there was no proper supervisory system in place.

       

Business Judgment Rule Cases in Indonesia :

One of the most recent events is the corruption case involving Karen Agustiawan (former CEO of Pertamina). Pertamina's business decision to invest in the Basker Manta Gummy (BMG) oil and gas block in Australia later resulted in a corruption charge and was processed by the Attorney General's Office. Karen was considered to have caused a financial loss to the state amounting to IDR 568 billion due to her negligence in the due diligence process of the investment in Australia. The defense presented by Karen's legal team, invoking the Business Judgment Rule (BJR) and arguing the absence of malicious intent (mens rea), was rejected by the judge in the first instance. On June 10, 2019, Karen was found guilty of corruption and sentenced to 8 years in prison, along with a fine of IDR 1 billion. This verdict was subsequently upheld in the appellate court.

Fortunately, on March 9, 2020, the Supreme Court (MA) eventually ruled to acquit Karen of all charges (ontslag). One of the reasons the Supreme Court acquitted Karen was that her actions were considered to fall under the Business Judgment Rule and were not criminal acts. According to the Cassation Panel, decisions made by the board of directors in a company's activities cannot be challenged by anyone, even if such decisions ultimately result in losses for the company. The judges believed that Karen's actions were a business risk, given the unpredictable nature of business, which cannot be definitively determined.

The 8-year prison sentence previously handed down to Karen by the court—despite her eventual acquittal at the cassation stage—has sparked controversy and raised concerns among directors of companies, including state-owned enterprises (BUMNs), about making business decisions.

Conclusion :

As outlined above, the Business Judgment Rule governs the provisions that protect the Board of Directors in carrying out their duties. The primary focus of the Business Judgment Rule, as stipulated in the law, is to provide protection in the exercise of their fiduciary duty as directors. As long as the directors can demonstrate that the business decisions they make meet the required criteria and can be substantiated as mandated by the law.

As stated in Article 1, paragraph (3) of Law No. 40 of 2007, the Board of Directors has a responsibility towards Social and Environmental Accountability, which is the company’s commitment to contributing to sustainable economic development to improve the quality of life and the environment, benefiting not only the company itself but also the local community and society at large. This represents a significant responsibility and authority for the directors in fulfilling their position within the company.

*Disclaimer: This article is for general information only and does not constitute legal advice. We accept no liability for any consequences arising from its use. Unauthorized use or reproduction is prohibited and may result in legal action. 

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Sources:

1. Bryan A. Garner, Black’s Law Dictionary, West, Thomson Group, United States of America, 2010, p. 212.
2. Lestari, S. N., “The Business Judgment Rule as an Immunity Doctrine for Directors of State-Owned Enterprises in Indonesia,” Notarius, Vol. 8, No. 2, 2015, p. 302.
3. Law Number 40 of 2007 concerning Limited Liability Companies.
4. Fuady, Munir. Modern Doctrines in Corporate Law and Their Existence in Indonesian Law. Bandung: PT Citra Aditya Bakti, 2014.
5. Supreme Court Decision Number 121 K/Pid.Sus/2020, dated March 9, 2020.
6. [Workshop] Preventing Corporate Fraud and Corruption through the Application of the Business Judgment Rule, NgertiHukum.ID.