The business judgment gap: Why BUMN investment decisions need a different risk framework in Indonesia

Indonesia's legal framework for prosecuting state-owned enterprise officials for corruption allows charges when decisions cause state losses, even without personal benefit or wrongdoing. This framework has been a subject of debate for two decades. As a senior manager in Indonesian risk functions, the reporter has witnessed the gap between business judgment and potential criminal exposure firsthand.

Three key elements in the law create this structural exposure: kerugian negara (state losses), the requirement of actual and concrete harm, and the lack of a business judgment doctrine applicable to BUMN officials. While common-law jurisdictions have business judgment rules protecting officers from second-guessing decisions made in good faith, Indonesian commercial law lacks a direct equivalent. This creates a situation where decisions deemed prudent under one framework may face criminal exposure under another.

The implications for risk management are significant. To mitigate exposure, BUMN investment officials must prioritize thorough documentation of decisions and justifications. This includes recording alternatives considered, external reviews, committee approvals, and dissenting views. The cost of weak documentation can be severe in legal proceedings. However, this conservative approach to documentation can also lead to a bias against high-conviction, contrarian investments, limiting potential returns.

To operate effectively within the current framework, BUMN investment functions should adopt three best practices: contemporaneous risk review documentation, embedding external validation in the investment process, and clearly separating business judgment from procedural compliance. By distinguishing between reasonable decision-making and procedural compliance, institutions can better protect themselves against later legal challenges.

Key lessons from observing BUMN investment governance reveal that documentation is the primary risk management tool, process is necessary but not sufficient, and conflict of interest disclosure is crucial. External counsel involvement during the decision process serves as insurance against later legal scrutiny. Ultimately, while the framework itself is a policy question, individual officials must adhere to the law as it currently stands to avoid criminal exposure.

The macro implications of BUMN investment decisions for Indonesia's economy and the capital allocation landscape are significant.