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Punishing CEO for violating duty of good faith
The Garuda case is unique in the sense that the center of the issue lies not in the day-to-day management of the company but rather in the director’s duty of good faith.
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Employees of the State-Owned Enterprises (SOEs) Ministry pass a line of flower boards placed if front of the ministry building in Jakarta. The boards are emblazoned with messages expressing gratitude and support for SOEs Minister Erick Thohir following the dismissal of Garuda Indonesia president director Ari Askhara over the alleged smuggling of a Harley-Davidson motorcycle aboard a newly delivered Garuda aircraft. (JP/Dhoni Setiawan)
T
he public was shocked by the recent dismissal of I Gusti Ngurah Askhara Danadiputra as president director of national flag carrier Garuda Indonesia following allegations that he smuggled a disassembled Harley-Davidson motorcycle and two Brompton folding bicycles on board a new Airbus A330-900 plane and manipulated the company’s financial report in 2018.
As fiduciaries, the board of directors is responsible for managing the company based on its business judgment rules. This power is stipulated under Law No. 40/2007 on limited liability companies, which states that such power must be in line with the purposes and objectives of the company and within the limits set forth under the laws and regulations and/or its articles of association.
With great power comes great responsibility, and in this regard, the responsibility is mainly owed to the government as the majority shareholder of the airline. Notwithstanding, Indonesian law also subjects the director’s authority to the supervision of a board of commissioners with regard to the management of the company.
The Garuda case, however, is unique in the sense that the center of the issue lies not in the day-to-day management of the company but rather in the director’s duty of good faith.
The very core of the duty of good faith itself infers that a director must always act in a bona fide manner, and as such, must always be honest. As company law experts MC Oliver and EA Marshall have put it, “A director is permitted to be very stupid as long as he is honest.”
Nevertheless, honesty manifests internally and interpretation of its existence cannot be proved objectively. As such, whether or not it is proper for a director to carry out an action is at least subject to three limitations: statutory duty, loyalty duty, and last but not least, duty to act for a proper purpose.
Directors’ obligation to fulfill their statutory duty refer to the laws and regulations in the general sense, as well as the company’s regulations and articles of association. A director has a duty to obey the laws and regulations as a regular citizen and a legal subject under the law.
