Business Judgement Rule Principle as an Immunity Right  (1)

(State Owned Enterprises of Indonesia)

A. Irmanputra Sidin, PhD in Constitutional Law/ Constitutional Lawyer

Jakarta, February, 15,  2025

The new law concerning of State Owned Enterprises of Indonesia  (SOEs) has finally been acknowledged, after Indonesian House of Representatives (DPR) agreed to the bill amending  SOEs Law Number 19 the Year 2003 which was proposed by President officially passed into Law on Thursday, February 4, 2025. In this new law, several important issues are addressed, but in this article, one issue I want to elaborate on is the Business Judgment Rule (BJR) principle. In fact, this principle is not a new legal concept created by political or social needs, rather, it is a concept rooted in natural law. 

The business judgment rule is an American case-law derived doctrine of corporate law which was developed by the courts to protect company directors from civil liability for the decisions they make on behalf of the company. The rule can be loosely described as a mechanism of protection of directors from civil liability in corporate transactions concluded in good faith and upon an informed basis, for the best interests of the company in circumstances where the decision-maker had no personal interest in the outcome. In the United States of America (hereinafter, ‘USA’), this rule has now been in existence for more than one hundred and fifty years. However, it is submitted that in spite of its advanced age, the business judgment rule is still misunderstood by both the courts and company law commentators. Since its inception in the USA, the business judgment rule has been transplanted and applied in most of the jurisdictions around the globe.^[1]

The BJR principle is derived from Article 28D The 1945 Constitution of the Republic of  Indonesia  (UUD 1945) which declared  that every person shall be entitled to recognition, guaranty, protection, and equitable legal certainty as well as equal treatment before the law. Furthermore, in Article 28 G , the constitution either declared that every person shall be entitled to protection of his/ her own person, family, honor, dignity, and property under his/her control, as well as be entitled to feel secure and be entitled to protection against threat of fear to do or omit to do something being his/her fundamental right. 

The BJR principle fundamentally rooted by natural law since our ancestor began establishing their enterprises through barter or simple trading with exchanges tool. In the early stage of the civilization, enterprises or businesses formed by one person or collective of people eventually evolved into what we now recognize as  companies. The organization requires  individuals to manage and coordinate daily operation in order to enhance and increase profits and revenue. Currently  we identify them as  executives or board directors.

However, the market does not consistently support companies in pursuing their goals to make profit because the market is volatile. The potential for growth, the hurdles and the uncertainties are “ever-presents friends”  for companies. The capacity of the directors to lead the business in competent and professional manner enables the businesses survive and grow with resiliences. In other words the companies need an “corporate actions” but It has  realized that the market tends to be unpredictable and subject to rapid change.

Moving on the next tale, it is important to note that not all individuals designated as directors can effectively implementing the trust placed in them to manage and develop assets. In several incidents and cases, the directors were eventually sued  by the owners, because they ran the business based on their personal interests or they were not serious or deemed negligent in managing the business, resulting a significant losses for the companies. In today’s context in the capital market when the Financial Statement shows a loss the ratio comparing the market price to its earning also turns negative, the Price to Earning Ratio (PER) turns significantly negative. This is happened not because the market turns sluggish, but because there are malicious motives of the directors at least gross negligence.

In other cases, there are directors who comply with the rules agreed upon with the owners and make decisions and take actions in good faith to generate profit. Nevertheless, due to market volatility and dynamics, or the downfall of a company’s partner, the company may suffer losses. The owners may blame and sue the directors in court, often fail to acknowledge that the market is always volatile. This often happens because the owners are impatient, seeking to get rich quickly, and ultimately blame the corporate actions of the directors, or they fail to recognize the condition of the company’s partner or other contributing factors. Warren Buffett, Charlie Munger, Peter Lynch, Howard Marks, and other investing moguls have said that the market cannot be predicted—only God knows—and owners must convince themselves to be patient

Due to impatience, many cases have arisen across the world where directors are sued in court by the owners. Over time, tens to hundreds of years ago, some cases began to establish a stable principle: a company’s loss does not have to be charged to its directors, as long as the corporate action was not a result of gross negligence, and was supported by information, goodwill, and honesty for the benefit of the company. Furthermore, the burden of proof lies with the party bringing the lawsuit. The Business Judgment Rule (BJR) began to grow as a principle of immunity for board directors.

There are many views that explain the BJR, which is rooted in the common law system, as previously noted. However, I am not sure if this principle, now widely accepted as the BJR, was viewed by our ancestors as an ‘unknown or unfamiliar’ value or principles. Simply put,  it is easily understood by people around the world. In the past, when our ancestors created companies, they were influenced by moral, social, financial, and market reasoning—elements that we now refer to as the BJR Principle. They sought individuals who were both capable and trustworthy to manage and develop their assets.^[2]

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^{[1] https://www.saflii.org/za/journals/SPECJU/2019/3.pdf}

^{[2] George S. Clason,1926,The Richest Man in Babylon}

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