In my previous article, it was explained that legal risk management seeks to uncover hidden risks, including risks that influence or accumulate with each other that have the potential to develop into an event.
The objective of a legal risk management is to map the legal risks braving your enterprise. It also affirms you in what way or to what extent those risks interact, potentially cause into a mutually accumulating risk.
Those in positions of responsibility and authority in the governance structure of the enterprise, have a “fiduciary duty” (including duties of care). In simple terms, this means that they are required to act reasonably and in the best interests of the enterprise, to avoid negligence or fraud, and to avoid conflicts of interest. In the event that the duties of care, the person breaching the duty is potentially liable to the enterprise for any damages caused to the enterprise as a result of the breach. This fiduciary duty is a duty to the enterprise as a whole.
All who play any role in the governance of the enterprise or any of its segments, and all employed staff, owe duties of care and loyalty to the enterprise and are potentially liable to the enterprise should they fail to act consistently with those duties. But The Board of Directors as a corporate organ that directly manages and represents the company in its daily activities plays a central role in the company, because from its management actions it is expected that the company will be able to develop and generate profits for the owners/investors.
That directors must always maintain their professionalism in securing company investments and assets mandated by particular share holders and stake holders in general. The Board of Directors can also and need to establish an internal oversight mechanism for the company, which covers the areas of corporate management in general, such as finance, production, operations and marketing.
In carrying out its duties, actions taken by directors are considered and treated as actions and actions taken by the company. As long as acting according to what is specified in the company’s articles of association, the company will bear all the consequences of the actions of the directors. As for the directors ‘actions that harm the company, what they do is beyond the limits and authority given or even something they do for their own sake, so that the directors’ personal actions can be requested.
Fiduciary duty is a relationship of trust between the director and the company he leads, which causes the director to only be a trustee, and demanded care and ability (duty of care and skill), good faith and duty of loyalty to the company with a high degree. In running the company, directors as internal organs often make speculative decisions and tend to suffer losses, it could be because there are precarious things that must be taken immediately to save the company from losses or vice versa can bring benefits to the company if it is taken quickly and appropriately.
However, the decision of the board of directors must be respected because the directors are people who understand well and are experienced in their fields, and regarding the protection of these actions are protected by the Business Judgment Rules. But on the other hand there are also directors who take the opportunity to take advantage of transactions, this certainly creates a conflict of interest between the personal interests of the directors (trustee)and the interests of the company (beneficiary). If this happens then all losses arising from the transaction will be borne by the board of directors personally.
Legal Principles Govern the Duties of Care
1. The duty to act in the best interests of the Enterprise.
This duty is very broad, requiring employees to exercise ordinary and reasonable care in the performance of their duties, exhibiting honesty and good faith. Thus, an enterprise volunteer or employee has the duty to exercise due care when acting on behalf of the enterprise, to attempt to avoid generating legal liability for the enterprise, and to attempt to further the enterprise’s interests rather than the individual’s own interests or the interests of any other party. The duty also imposes an obligation to protect any confidential inform obtained while serving in the fiduciary role with enterprise.
2. The duty to avoid conflicts of interest.
The duty of loyalty encompasses a duty to avoid conflicts of interest and to provide undivided allegiance to the enterprise’s objective. A conflict may exist when employee of the enterprise participates in the deliberation and resolution of an issue important to the enterprise while the individual, at the same time, has other professional, business, or employee responsibilities outside of the enterprise that could predispose or bias the individual one way or another regarding the issue. In these situations, it is typically not enough for the individual to be aware of the conflict and to attempt to act in the enterprise’s best interest despite the conflict. On the contrary, for many conflicts, full disclosure to the organization and refraining from participation in the organization’s deliberation and resolution of the issue are required to remedy the conflict. For serious, visible, continuing, or pervasive conflicts, withdrawal from the employed position, or from the outside conflicting responsibility, may be required. It is important to be sensitive to and to avoid apparent conflicts of interest as well as actual conflicts.
In the context of an enterprise’s self-regulation programs (ex., professional or business ethics enforcement, professional certification or academic accreditation, product standards and certification, and similar programs), the duty to avoid conflicts of interest also mandates that all individuals acting on behalf of the enterprise not have conflicts with respect to the interests of the persons, products, or entities that are the subjects of the particular activities or proceedings in which the individuals are involved. Thus, for example, staff member of an enterprise committee considering certification of a particular entity’s services must not participate in consideration, deliberation, or resolution of the matter if the person has relationships or interests that (a). Give the person an economic stake in the outcome, (b). Enmesh the person with any party or witness in any way, or (c). Afford the person prior knowledge about the matter that causes the person to prejudge its appropriate outcome. No employee should serve in the same matter in both an investigatory and an adjudicatory role.
3. Corporate Opportunities.
Conflict of interest specifically prohibits competition by an enterprise employee with the enterprise itself. Those individuals may generally engage in the same “line of business” or areas of endeavor as the enterprise, provided it is done in good faith and without injury to the enterprise. One form of competition that is not permitted, however, is appropriating “corporate opportunities.” A corporate opportunity is a business prospect, idea, or investment that is related to the activities or programs of the enterprise and that the individual knows, or should know, would be in the best interests of the enterprise to accept or pursue. An enterprise’s employed representatives may take advantage of such a corporate opportunity independently of the enterprise only after it has been offered to, and rejected by, the enterprise.
Illustrate concerning Fiduciary Duties
The following descriptions are fictional. They are designed to illustrate the nature of legal risks faced by enterprise employees in the area of fiduciary duties. Any resemblance to actual persons or to institutions or entities is completely unintentional.
Illustration I: negligently damaging the interests of the enterprise
National enterprise of mining is divided into regional that operate exploration site to encourage governments to adopt acceptable environmental regulations applicable to the company. President Director learns that operation director for the regional have agreed that they will simultaneously raise prices if the State adopts particular unfavorable environmental regulations. Although the President Director knows that this conduct would very likely violate the antitrust laws and could potentially implicate the enterprise and impose substantial liability upon it, the chair neither attempts to discourage the activity nor notifies the enterprise’s executive staff or legal counsel. The scheme is uncovered by the government, which conducts an investigation and adjudication including the enterprise as a target; ultimately, the enterprise pays a substantial fine and pays six-figure defense costs. The enterprise learns that the President Director had knowledge of the scheme in advance and failed to act. The President Director could be held liable by the enterprise for its fines paid to the government and for its defense costs.
All employees have a duty to act reasonably in the enterprise’s best interests. If one has reason to believe that the enterprise’s interests are in jeopardy, one must notify appropriate personnel promptly and take whatever additional steps are suitable to avoid the liability for the enterprise.
Illustration II: Engaging in Self-Dealing
A member of board of director owns a substantial interest in a small, emerging computer software company but is actively involved in its management. Without disclosing this relationship with the company, the individual suggests to the enterprise’s chief employed and chief financial officer that they consider this company as the vendor a large software purchase contemplated by the enterprise. When procurement team comes to the Board for a choice among several competing bidders for the contract, the member argues strenuously and successfully that the contract should go to this company, still not disclosing her ownership interest in the company.
The board member’s failure to disclose a business interest and to withdraw from the enterprise’s consideration of the matter is an obvious violation of the member’s fiduciary obligation. It could subject the person to liability to the enterprise, to its members or to its creditors.
Anyone with a personal stake in an enterprise decision should disclose that interest and recuse oneself from deliberation and decision on the matter.
Self Dealing in Indonesia
The Board of Directors is required to take full responsibility for the management of the company for the interests and objectives of the company, and to represent the company, both inside and outside the court. Responsibility for the company’s losses can be directed towards the company itself, each shareholder or creditor in terms of the bankruptcy of the company. In such a context it means that both the company, shareholders or creditors who have been harmed as a result of the decrease in the company’s assets due to the directors’ good intentions that occur as a result of mistakes or negligence in acting, acting or making decisions have the right to sue the directors.
It is seen at a glance that corporate law implies that directors must manage the company with care. The Board of Directors may not take advantage of opportunities that should be owned by the company and take actions that result in conflicts of interest by making unilateral actions (self dealing). If this happens then the losses incurred in the decision or action are the personal responsibility of the board of directors. In the Company Law Number 40 of 2007, there is no specific regulation regarding the above but implicitly contained in Article 97 paragraph (3) which states that each member of the Board of Directors is personally responsible for the company’s loss if the person concerned is guilty or negligent in carrying out his duties accordingly with the provisions referred to in paragraph (2).
Unlike in Indonesia, common law countries have a classification of good faith, while what is meant in good faith and full responsibility in countries that adhere to the common law system is by not doing things such as attending meetings, not studying the basics of the company’s business that he leads, does not read reports, does not attempt to ask for help needed when there are signs about the arrival of the danger to the company, or has neglected the obligation to take careful action.
As a result of the directors’ actions that harm the company, the company can sue the directors to be personally responsible for the losses they have caused. The author in this case tries to refer with a case regarding the directors’ personal liability for the company’s loss, based on a Civil Court Decision Number: 305/Pdt.G/1998/PN.JAK.SEL between PT. Sigma Batara against the former board of directors of Indover Bank, where the company is engaged in securities trading, underwriters and investment managers filed a lawsuit against former directors who have carried out self-dealing actions that harm the company by buying matured
promissory notes and default which was decided by the Panel of Judges of the South Jakarta District Court.
How Does to Minimize Risk?
- Place the enterprise’s interests first in dealings on the enterprise behalf. Be alert to possible opportunities and risks, and promptly inform appropriate personnel concerning those opportunities or risk
- Be alert to possible conflicts of interest and to circumstances that that could create even the appearance of a conflict of interest, and at a minimum disclose those conflicts before taking part in any deliberations or decisions on subjects where conflicts or possible conflicts exist.
- Be aware that recusal may be appropriate where an actual or apparent conflict of interest exists.
- Preserve the confidentiality of information acquired in one’s capacity as anemployee of an enterprise wherever it appears that the information is proprietary to the enterprise.
- Do not appropriate corporate opportunities available to the enterprise.
- Adoption of a policy governing the conduct of governance employee and staff relative to addressing conflicts of interest may help avoid problems in this area.
Fuady Munir, Doktrin-Doktrin Modern Dalam Corporate Law & Eksistensinya Dalam Hukum Indonesia, Bandung : PT. Citra Aditya Bakti, 2002
—————-, Perseroan Terbatas- Paradigma Baru, Penerbit PT. Citra Aditya Bakti, Bandung, 2003
Susilo, Leo, dkk, Manajemen Risiko berbasis ISO 31000.