The Legal 500

In a Limited Liability Company (”Company”), the Director is one of the Company’s organs who oversees the activities of the Company. In overseeing the activities of the company, the Director has the right and authority to act for and on behalf of the Company.

The acts of the Director are only in the interest of the Company and for the purpose of achieving the company’s objectives. In short, whether a Company’s objectives are achieved or not depends on the acts of the Director. This creates the fiduciary duties (a relationship of trust which gives rise to so a principle of responsibilities due to the duties and position entrusted to him) of the Director to the Company so that he can perform his duties with full responsibility.

In law literature there are at least 5 components in the concept of fiduciary duties (from the Common Law system), i.e.:

1. Duty of Loyalty, meaning that as a decision maker in a company, a Director must act to achieve the Company’s objectives and in the interest of the Company. His acts are not in his personal interest and must not be in conflict with the Company’s interest;
2. Duty of Care. Based on this principle, a Director must not have any "conflict of interest" in making a decision and the decision must be based on the prudential principle;
3. Duty to disclosure, meaning that a Director must disclose any material information when a Director’s act requires an approval from the Shareholders, or when there is a possible "conflict of interest" in overseeing the Company’s activities;
4. Duty of skill, meaning that skills to manage a Company are the requirement that must be possessed by a Director and a Commissioner. As the top management in a Company, this professional qualification is an absolute requirement. In practice, this Duty of skill is performed by conducting a fit & proper test for a nominee Director;
5. Duty to act lawfully, meaning that a Director must lead the Company according to the prevailing laws and regulations. A company complies with not only the law on company (Law No. 40 of 2007 on Limited Liability Company/Company Law), but also other prevailing laws and regulations such as the tax law, civil law, labor law, land law, environmental law, anti monopoly and unfair business competition, and so forth.

In performing his fiduciary duties, a Director must also have good faith. This obligation to oversee the Company’s activities in good faith is called the "Duty to act in good faith". The meaning of the Duty of good faith is as follows:

1. act in the best interest of the company;
2. not to put yourself in a position where your personal interest or a duty you owe to another conflicts with the duties you owe to the company;
3. only use company property for the benefit of the company and not for your own benefit.

In performing his duties in good faith, a Director must try his best to avoid any conflict of interest between his personal interest and obligation and the Company’s interest and his obligation to the Company, such as using the Company’s assets in his personal interest (duty of loyalty and duty of care).

In addition to achieving the Company’s objectives, a Director’s fiduciary duties are also performed in order to apply the principle of Good Corporate Governance ("GCG") in managing a Company. In general, here are the principles of GCG that must be implemented by a Director in managing a Company:

1. Fairness: in managing a Company, a Director must ensure equal treatment to all shareholders, including minority shareholders and majority shareholders. This fairness principle can be realized by making corporate regulations that protect the interest of the minority, making the company’s code of conduct, so that there will not be any gap in the Company.
2. Transparency: Transparency is an important principle to avoid any fraud. This principle acknowledges that the shareholders have the right to get correct, accurate, and timely information about the performance if the company, its finances and operations, and information about the company’s objectives. This is in line with one of the Director’s fiduciary duties, i.e. the duty to disclosure;
3. Accountability: The accountability principle contains the obligation to present and report any conduct and activity of the company in its financial administration to the shareholders. A Director is appointed by the shareholders, so actually the Director represents the shareholders. In applying this principle, a Director must make a financial report thoroughly. The financial report made by the Director has a tremendous impact on the Company not only for the purpose of distributing dividends to the shareholders, but also in the interest of the Company’s taxation.
4. Responsibility: The responsibility principle covers matters pertaining to the fulfillment of the Company’s social responsibility as part of the society. In short, a Company must uphold the rule of law, among others, by following tax regulations, labor and safety regulations, health regulations, environmental regulations, consumer protection regulation, and prohibitions of monopolistic practices and unfair business competition. In the responsibility principle, a Director not only oversees the Company’s daily activities, make a financial report and follow all the prevailing laws, but also fulfill the society’s needs in ihists community and protect the interest of all the stakeholders.

Besides the above matters, a Director, according to the Company Law, must also ensure that the Company has a harmonious and balanced relation with the environment, values, norms and culture of the local people. In particular, a Company whose business is in the sector of and/or related to natural resources must perform its Corporate Social Responsibility.

Based on the above, it is clear that a Director has a tremendous responsibility for a Company’s success in achieving its objectives. Therefore, in appointing a Director, the shareholders must carefully pay attention to the capability and integrity of the nominee Director. In the company law, it is stipulated that those who may be appointed as Directors are individuals capable of performing legal actions, except those who in the 5 (five) years previous to their appointment have: (i) been declared bankrupt; (ii) been members of a Board of Directors or a Board of Commissioners declared to be at fault in causing a Company to be declared bankrupt; or (iii) been sentenced for crimes which caused losses to the state and/or were related to the finance sector. In practice, the nomination of a Director by a shareholder is often for the purpose of facilitating the shareholder’s objective (nominee director). A Director is often only asked for his signature for a transaction which he knows nothing about. Therefore, it is important for a Director to know that his every action results in legal liabilities for him.

If a Director is at fault or negligent in carrying out his duties, then under Article 97 paragraphs (3) and (4) of the Company Law, it is stipulated that a Director shall be personally liable. If it involves more than 2 (two) directors, the liability shall be joint and several for each member of the Board of Directors.

Often in practice, the shareholders appoint a Director only as a vehicle to protect their interest and wishes, without regard to the capability and integrity of the Director concerned, or do it quickly without any fit and proper test. Although the Company Law only explicitly stipulates the fiduciary duties for a Director and a Commissioner (Article 92 and Article 97), it is clear that all the components of the fiduciary duties must be perfomed by a Director. His role is so great in leading the Company to achieve its objectives, so that the Company can gain a profit and expand its business in the future. On the other hand, a Director must also remember that his every action carries legal consequences (including tax liabilities) for himself.

Only with leadership by a Director with capability and integrity in overseeing its activities, will a Company be able to compete with other companies and eventually stand in the forefront and reap benefits for itself and the society.

Retno Wulandari

Partner Frans Winarta & Partners