• Statistics and Facts: Any Correlation?

    All right, this is indeed a hilarious post from Greg Mankiw. The statistics show that children from higher income families are getting higher average SAT scores, and some people claim that there is a correlation between income and better result of tests. However, Mr. Mankiw theorizes that the correlation is not on the income rate, but on the fact that smart people are making more money and these people pass their genes to their children, thus smart children comes from smart parents not from rich parents. Okay, I'm not a professional statistician, but when dealing with statistics, I always remember what David Hume, a Scottish philosopher, has taught us on making a conclusion from our experience: just because in your experience an act is always followed by the second act does not mean that there is a causality between the first act and second act.

    In Nassim Nicholas Taleb's wisdom (taken from his book "Fooled by Randomness"): "no amounts of observations of white swans can allow the inference that all swans are white, but the observation of a single black swan is sufficient to refute that conclusion." If translated: even after going through 1,000 successfull experiments, you will never be able to claim that a hypothesis is correct with 100% degree of certainty, but it will only need one failed experiment to reject such hypothesis. I agree with both of Hume and Taleb.

    Previously, I have made some hypotheses with certain logical reasoning in my blog. Will it always be correct? Of course not! Situation and condition may change or maybe I haven't considered all of the relevant issues and facts, or maybe there is a fallacy within my seemingly fine argument. Mr. Mankiw is correct in saying that the ones who conclude that there is a relationship between family income and better test results might be wrong, but I also dare to say that his conclusion might not be correct either. Are there any relationship between smart people and their incomes, i.e. the smarter you are, the higher your income? I don't know, though I do know some rich stupid people and some poor to average smart people. Further, how many data should we collect before we can make such conclusion? Again, I don't know. My advice is simple, be very careful when we are dealing with statistics as people can always make different conclusions and interpretations from such statistics. When you think that a correlation between facts exists based on a result of a statistic, you better think it through again.
  • Can Guaranteed Bonuses Induce Excessive Risk Taking?

    Yes, according to Lucian Bebchuck, a law professor from Harvard Law School. A guaranteed bonus may, to certain extent, create distortion in determining the business risk of a company. By having the benefit to receive a guaranteed bonus no matter what the performance of the company, there would be a considerable pressure for the management to meet the company's business target or even exceed such target. As a result of this, the management may take unnecessary risks in doing the business just for the sake of getting better performance. We need to understand that in some cases, riskier business decisions may provide higher results, but they may also cause greater losses. When the results are losses, who would be the largest victim? The Company and also the shareholders.

    Further, Prof. Bebchuk theorizes that if the bonuses of the management were distributed based on the overall performance of the company, say after reaching a minimum amount of annual profit, the management will have better consideration in doing the business, i.e. they would only take the risks if the odd of getting the intended performance are higher than the odd of getting a lower results. Why? Since the management bonuses are now tied to the performance of the company, it would be dangerous for them to take too much risks because if the results are bad, they will also lose their bonuses. As a result, they would play safer.

    Again, this shows how incentives work in our life. I would love to see how this will be implemented in Indonesian regulations. While I absolutely don't agree if the regulator is trying to limit the amount of benefits that can be obtained by the management, a policy on how to structure the best benefit package should be okay, provided that companies can freely choose to adopt such policy or not (as will be determined by the shareholders and, if possible, an independent remuneration committee).
  • Using Indonesian Languange on Contracts: Mandatory?

    To certain extent, the answer would be yes. Why? See here (it is in Indonesian language, but no worries, we will only discuss one article and I'll provide the translation below). On 9 July 2009, the Indonesian Government issued Law No. 24/2009 on the Flag, the Language, the National Emblem, and the National Anthem. The title says it all, so I don't expect to provide a summary of this Law in my blog. While I don't see the necessity to have this kind of regulation, I can understand that the Government is trying to increase Indonesia's profile, particularly the use of Indonesian language.

    Now, onward with the main theme for today, I have some concerns with the application of Article 31 Paragraph (1) of this Law, which states (unofficially translated):

    "The Indonesian Language must be used in any memorandum of understanding or agreements which involve state institutions, Indonesian government agencies, Indonesian private institutions, and Indonesian individuals"

    This is a provision that I would call as inefficient and unreasonable. Why oblige parties to use Indonesian language in their contracts? There are many reasons for Indonesian companies to use foreign languages (notably English) for their contracts with another Indonesian parties, such as: (i) the relevant Indonesian company has several foreign creditors and therefore most of its contracts were made in English so it would be easier for its creditors to review such contracts (if necessary); or (ii) the relevant Indonesian company usually enters into contracts with foreign parties and therefore its standard contracts were mostly made in English. We need to understand that the costs for drafting Indonesian version of the contracts are not always cheap, so I'm asking once again, why force them to use Indonesian language and penalize them with unnecessary costs? If the parties need to use Indonesian language for the best interest of both parties, they would do so without having to be forced by this Law. Having this kind of provision is indeed an exaggeration.

    In addition, forcing Indonesian parties to draft all of their agreements in Indonesian language may cause unnecessary risk (due to its ambiguity), i.e. Indonesian parties with bad faith (of course, supported by their lawyers) may claim that contracts made with another Indonesian parties are invalid and should be annulled by operation of law simply because such contracts were not made in Indonesian language. That would be horrendous! What should be considered as an administrative breach can now be deemed as a major breach of law which could cause a contract to be annulled, all because of an ambiguous provision which shouldn't even exist in the first place.

    Of course as a lawyer, I would love this provision since it will create additional job for lawyers, i.e. translating standard English contracts into Indonesian language. Sure it's a boring stuff, but it can generate some nice incomes :).

  • On Becoming a Libertarian Paternalist: Designing Better Policies for the Society (Part 1)

    A Libertarian Paternalist is someone who believes in Libertarian Paternalism, but since I'm guessing that most people wouldn't even know the definition of Libertarian Paternalism, you can check the definition here. So, why are we discussing this issue?

    I have just finished reading a book titled "Nudge," and a very interesting book it is. Made by Richard Thaler and Cass Sunstein (Professors of economics and law at the University of Chicago, respectively) this book introduces the movement of Libertarian Paternalism, a movement that supports governments and private institutions to adopt policies which can maintain or maximize people's free of choice while in the other hand influence those people to improve their life and important decisions, such as wealth, health, and happiness. The basic reasoning is quite logic, people make errors most all the time and in reality, there is no such a neutral design in making a policy, so why don't we maximize the possible choices for the people, design the most possible best options, encourage people to take the best options, but ultimately let them also be free to take their own actions with regard to the choice alternatives?

    The book also offers several forms of incentives and methods that can be used by governments and private institutions to improve people's life in accordance with the Libertarian Paternalism movement. For someone who are trying to find how to structure the best policy or regulation for certain issues in this life, I find that this idea is enlightening.

    Human = Error?

    I have to admit that the idea that common people tend to err on a regular basis is quite disturbing. However, there are too many supporting facts on this issue that would prevent us from declaring the idea to be baseless. See this site for additional insights on human errors, especially with respect to daily economic activities (by the way, Dan Ariely's book, Predictably Irrational, is also highly recommended).

    While I believe that men are rational beings, i.e. able to think rationally and make decisions on a reasonable basis, I can't deny the fact that our decisions are subject to various internal and external factors, and these factors may take a dominant position, even more dominant than our own rationality. Let us face it, how many times did we make a decision based on a cool and wise demeanor? I bet that most of us will answer: seldom. In most cases, decisions are being made by our impulsive side, the automatic system in our mind which is very vulnerable to biases and blunders. Not to mention our weak self control, overconfidence, excessive ignorance, and tendency to follow the herd (i.e. going with the trend without too much thought). All of these factors may negatively affect our ability to make a better choice in our life.

    See some of these interesting examples:

    1. On Procrastinating
    Procrastinating is always be a big problem for most of the people. You might be familiar with these statements: "I'll save money as soon as possible," "damn, I'm getting fat, I should exercise tomorrow," or "well what do you know, the deadline for the paper is still three months, I guess I'll take a break for a week and finish it later." Yes, most of us procrastinate, including myself. But how come? Aren't people aware on the danger of being obese, or retiring from a job without any saving? Then why people still procrastinate? Is it due to irrationality or an overconfidence or simply an inability to grasp the actual risks associated with our actions?

    Have you ever think why some governments issue mandatory pension plan for their citizen, where the citizen is forced to put some of their salaries to their pension account? I dare to say that this is one of the reasons.

    Having a mandatory pension plan is a positive nudge, although of course how we should structure such plan to reach the maximum results is another case to be discussed. By having a mandatory pension plan which automatically enrolls worker to some form of pension funds, the government may save people from being poor after their retirement due to low saving. True that the pension plan can go bust, but the risk is smaller than letting people not having any pension plan.

    2. On the Ownership Bias
    Several researches made by Thaler & Sunstein and Dan Ariely reveal that people are having difficulties in determining the value of certain goods due to the ownership problem. Those who possess an asset tend to value their asset higher than those who don't posses such asset, and the discrepancy of the value can be very, very huge. In one of Thaler & Sunstein experiments, participants are being given a mug or a chocolate bar having the same price. Half got the mug and the other half got the chocolate. Interestingly, when they are being asked to trade their mug with the chocolate and vice versa, only 10% of the participants are willing to trade. Why?

    In another case, Dan Ariely made an experiment using college students where some of them successfully obtained a ticket for a really famous university basket ball final competition and the others failed to do so. These tickets are very hard to obtain, and most students must spend their nights in tents just to have an opportunity to get lotteries for getting the tickets. Yes, lotteries! Even after spending two days in tent, they still need to push their luck to get those tickets. However, despite the difficulties in getting those tickets, there were many students who participated in getting the tickets.

    After the tickets distribution, Dan contacted students from both sides to find out how much they value their tickets, and he found a very amazing result. In general, those who failed to obtain such tickets were only willing to pay max US$170 for buying one ticket, whereas those who obtained such tickets were only willing to sell their ticket for a minimum of US$2,400 per ticket. This is amazing, especially when we considering the fact that before the distribution of the tickets, almost all students were very eager to obtain the ticket.

    So, what is the effect of this ownership bias? Because people tend to value their owned goods higher and hates losses for whatever they cost, they would be more likely stick with their current holdings, even when such condition is not always better. In a more complex way, the ownership bias can be used to lure consumer toward what Dan Ariely calls the "virtual ownership," i.e. making people think that they have ownership over an asset in order to increase the opportunity of such people to purchase the assets with a higher value. One example is where your cable TV operator provide you with a "gold package" limited trial period with a discount. after certain period of having a standard package. When you try it for the first time, most of you would probably think that if you don't like it, you can always back to the standard package, or say, downgrade it a little to the "silver package." But in reality, most people tend to just stay with the gold package after the limited period expire even though the price has become more expensive. Why? Because people hate to lose the facility that they have obtained previously.

    Ask yourself, it's hard to downgrade your quality of life right? As long as you have sufficient funds, you would most likely try to maintain your quality of life, even if it is getting more and more expensive, rather than to cut some expenses and save more money from the cutting. So don't be confused when some people claim that the richer you are, the bigger your expenses will be.

    3. On Free Items Bias
    Other experiment made by Dan Ariely shows our fragile way of thought when we are dealing with free items. The experiment was done in a halloween day where Dan gave chocolates and candies to kids wearing costumes. At first, he would give these kids three small Hershey candies and then give them 2 options, i.e. (i) if they are willing to give him back one candy, they'll get a small Snickers chocolate bar; or (ii) if they are willing to give him back two candies, they'll get a big Snickers chocolate bar (twice the size of the small Snickers). The Hershey candy itself only worth 1/10 of the big Snickers.

    In the first experiment, almost all children successfully pick option No. 2. However, in the second stage of the experiment, Dan change the condition, i.e. (i) they'll get a small Snickers chocolate bar for free without having to give any of their Hershey candy; or (ii) if they are willing to give him back two candies, they'll get a big Snickers chocolate bar. Interestingly, now most children take the first option which, if viewed by a rational man, should be considered as a very bad choice. Again, how come? It is also interesting that Dan repeated a similar test to other people, including college students, only to find similar results! Seems that there isn't much development in human behavior when we're dealing with this kind of issue as children and adults encounter similar results.

    It doesn't take a genius to understand that the free item bias have been used many times for business marketing purposes. Try to think of some, and you'll soon realize it. Next time, when you go to a sale, try to compare, would it be better to have a 50% discount or a buy one get one benefit? Or, what is better, having a 30% discount or a buy 2 get 1 benefit? When you're getting this question, you will start to think carefully in determining the best option. But, if people are not thinking it through, I dare to say that most people will take the buy one get one or buy two get one benefit.

    Rational Imperfect Beings and The Need to Design Better Policy
    We have discussed above some examples of the great ability of men in making errors in daily life. But let us don't forget that men is able to think rationally, men respond to incentives and information. We might be imperfect beings, but it doesn't mean that we are completely irrational. If the government or private institutions can design a better policy which will encourage people to really think deeply about their life and decisions, wouldn't that be very good?

    What are the criteria for designing a good policy? You'll have to wait the second part of my post. So please be patient on that :).
  • Greater Involvement of Public Shareholders in Appointing Directors and Commissioners of Publicly Listed Companies: Why and How?

    Related to my post on 18 August 2009 where I discussed how US lawyers and law professors make comments on a proposed regulation, after seeing another recommendations from several professors from Harvard Business School and Harvard Law School on the proposed amendment to an SEC Rule which would allow shareholders of publicly listed companies to have greater influence in deciding the composition of the board of directors and commissioners ("SEC Regulation"), I'm getting pretty interested with the actual content of this SEC Regulation.

    You can read the 250 pages of the SEC Regulation (which include the proposed amendments and a thorough review of such regulation from the SEC team complete with list of detailed questions asking for public comments) here, and if you are also interested to read the US lawyers' comments on that SEC Regulation for some additional insights, you may read the 40 pages comments here. Be warned however, considering the total pages of those documents and the fact that they deal with complicated US securities regulation, it would be wise if you don't waste your time to read them unless you have a legal background, consider long and complicated reading materials as entertaining, and have absolutely nothing important to do :). Of course, you can simply read a quick summary of the main issues of such regulation below.

    Summary of the SEC Regulation

    Okay, since this SEC Regulation also deals with certain issues which might only be applicable to US Laws, the summary below will only cover the main issues which might be relevant for Indonesian corporate law, i.e.:

    • the main purpose of the SEC Regulation is to increase public shareholders participation in determining management candidates for the relevant publicly listed company and to increase information transparency of the candidates themselves;
    • to satisfy the above purpose, the SEC Regulation requires publicly listed companies to provide information on the candidates in the proxy materials for the shareholders with respect to a general meeting of shareholders; and
    • the SEC Regulation also tries to determine the qualification of shareholders who can propose candidates of management members, which include having a minimum percentage of shareholding and a minimum period for holding the shares in case their proposed candidates are successfully being elected as the management of the company.
    With respect to the above proposed provisions, the Professors from HBS and HLS recommend the SEC to adopt such regulation with the following recommendations:
    • the minimum amount of shareholding percentage for proposing candidates of directors and commissioners shouldn't be too small (the SEC Regulation proposes 1% but this amount will also depend on the total capitalization of the relevant publicly listed company), as it may cause too many competing candidates for leading the company;
    • the main point of this SEC Regulation is to have more information on the candidates and if possible, new people on the board of management, not for the sake of making trivial contests, therefore, the threshold for proposing candidates should be increased, say around 5-10% provided that this threshold can be further reviewed in the future in accordance with the relevant situation and condition; and
    • there should be a minimum period for holding the shares of the relevant publicly listed company after the appointment of the relevant shareholders' proposed candidates is successful, say at least 1 year, just to make sure that the appointed directors/commissioners and the shareholders are serious with the long term development of the company.
    Why am I Interested with this Particular SEC Regulation?

    It's quite simple though, until today, Indonesia does not have a specific law which deals on how public shareholders of a publicly listed company can propose candidates for the directors and commissioners of such company and when the information on such candidates should be available to the public.

    Under the current Indonesian Company Law, any shareholder(s) having at least 10% of the total shareholding of a company (unless the articles of association of the company provide a lower threshold) would be able to propose a general meeting of shareholders (including proposal of the agenda of such meeting). So in theory, if you satisfy the 10% threshold, you should be able to propose your own candidates. However, I haven't heard the actual application of this concept in publicly listed companies.

    In addition, it is almost becoming a general practice that the information on the management candidates will only be provided on the date of the general meeting of shareholders. As a result of which, shareholders often do not have the privilege to review the candidates competency beforehand and may not have complete information in determining the best candidates for the management position.

    Having said the above, I would like to analyze whether at this current stage Indonesia should be required to have a similar regulation with the above one. Of course, I don't expect that we will have a detailed and sophisticated regulation like in the US, we're talking about the principles only. The drafting of such regulation should only be discussed after we can clearly agree that the regulation itself is needed.

    The Necessity of Having Better Transparency and Fairness to All Shareholders

    Balancing the relationship between the management and shareholders of a company will always involve some problems, particularly because there are no perfect guidelines on how the management should maintain the relationship with the shareholders. Some legal theorists argue that the management is, to certain extent, acting as the agent of the shareholders, and therefore must act for the benefit of such shareholders. But then again, some of them also argue that the management should act to the best interest of the company, whereas, the interest of the company may differ from the interest of the shareholders.

    While we can talk anything in theory, in practice we would need to understand that since the management is appointed by the shareholders (and of course they can always be replaced by the shareholders), there would always be an incentive for the management not to acting in the best interest of the company, particularly when such action might cause them to lose their position or possible remuneration. As a result of which, when a company is being massively controlled by certain controlling shareholders, the possibility of management breaching their fiduciary duty to the company would be most likely increased.

    However, the case can also be turned the other way around, that is, if the shareholders of the company are too diversified and no one has majority control over the company (such as in certain publicly listed companies), the management of those companies would be in a stronger position to determine their own actions and rewards and will have less incentives for having better accountability toward the shareholders.

    In both cases, the victim would mostly be the public shareholders, i.e. those who cannot be considered as the controlling shareholders. Indeed, Indonesian laws have provided some form of protections for these kind of shareholders, such as the right to request the company (or any third parties appointed by the company) to purchase their shares with a fair price in case they suffer losses due to decisions made by the general meeting of shareholders or the management of such company. For publicly listed companies, the case would be easier. If the company's shares are liquid, the shareholders who don't agree with the company's decision could simply sell their shares in the market.

    While this protection mechanism can be considered as a good policy, it has one significant problem, i.e. it encourages public shareholders to leave the company instead to stay for a longer period. What happen if those shareholders actually believe that in the long term the company has a very good prospect, but because of the current condition, they are "forced" to sell their shares? And how about institutional investors who may have quite a huge amount of shares though they are not yet considered as controlling shareholders? They may face some difficulties in selling their shares in the market.

    Further, the most important question is why we penalize the company to purchase the shares of the public shareholders who don't agree with the decisions made by the organ of the company? Wouldn't that be counter productive for the growth of the company itself?

    I always believe that giving more choices to the public would benefit us all. Therefore, it would also be better if we can have a regulation which can increase public shareholders' participation in determining candidates of the management of the publicly listed companies, including better transparency with respect to information on the management candidates and fairness to any shareholders to propose their own candidates (provided that they satisfy the minimum threshold for shareholding). In this case, adopting a similar regulation with the SEC Regulation would be recommended by me. Further comments from the HBS and HLS professors should also be considered as those comments are very relevant in ensuring that the regulation is workable enough in

    One question remain though, what would be the use of giving the opportunity to public shareholders to propose their own management candidates if in the end they will not have sufficient votes to approve the appointment of their candidates since the controlling shareholders do not agree with the candidates? This is particularly relevant in Indonesia where it is very rare to find a publicly listed company which does not have any controlling shareholders.

    To solve this issue, it may be possible that the threshold of appointing candidates proposed by public shareholders shall be reduced to allow voting by minority shareholders or that the controlling shareholders shall have no votes with respect to the appointment of such candidates. (as if in a conflict of interest transaction). Further discussion on this issue would be definitely useful.

    To end this article, it is important to note that while having better transparency and fairness for public shareholders in determining the management candidates might help a company to increase its performance, it wouldn't be quite effective unless there are other incentives which may directly affect the behavior of the management. In this case, I refer to the remuneration system of the management. To see my proposal on this issue, I recommend you to read my post on 17 August 2009, where I discussed the use of independent committee in determining the remuneration of the management.
  • Young Girl Goes to Law School: What's Wrong with That???

    This story is hilarious, particularly because people have many different views on whether a 19 years smart young girl should really go to a law school. Okay, I understand that in the United States, a law school is designed as a grad school, means that you need to at least have a college degree before you can enter into such law school. And, since I've never gone into a US law school, I don't know whether the education there is really hard or not. However, in Indonesia, you can go straight to a faculty of law of an university after being graduated from your high school. I join my faculty of law when I'm still 17 years old, and already start my career as a lawyer when I'm 21 years old. And that's very usual in Indonesia. I've seen many good young lawyers, they can do a decent job and will be even better with more experience from years to come. So what's wrong if a 19 years old girl chooses to go to a law school? I say, the younger the better. I believe that those who start at a fresh young age will have a lot more of time to adjust themselves with the law world and therefore may develop their career faster. Being a lawyer might be a tough job, but it's fun. It will definitely involve some administrative paper work, but you won't do that forever, because along with the progress of your career, you'll have a lot more of experience and get more challenging and interesting jobs. Just remember one thing, a lawyer's career may depend on various factors, but in the end the most dominant factor would always be yourself. So for Miss Kate Laughlin, congratulations on your enrollment and welcome to the ever changing world of law.
  • The Power of Incentives: Fighting Terrorism With Radical Laws

    This article is inspired from my discussion with Rob Baiton related to his post, Fatwa and Terrorism. The problem of terrorism is always an interesting theme for me, particularly because I absolutely hate terrorism (for whatever reasons) and because I wrote my thesis on the retroactive implementation of the Indonesian Terrorism Law to the 2002 Bali Bomb Case. In this case, retroactive implementation means that a law is being implemented to a case that occurred prior to the enactment of such law.

    In my thesis, I analyzed the Constitutional Court decision which annul the above retroactive implementation, and after conducting an in-depth research including on the historical background of the non-retroactive principle of criminal law, I disagreed with such annulment. To cut it short, for me, when we are dealing with extraordinary crimes, we should also use extraordinary actions to combat them. This is not a place for someone to say something like: "then what would be the difference between us and the terrorist?" That might look interesting in a movie, but in reality, sometimes we are forced to do some radical things in order to put down dangerous and illegal actions.

    Now, I will elaborate some of the basic ideas that have been previously discussed with Rob, i.e. what kind of policy which would work best to reduce terrorism, and whether we can use a law that penalizes people for a crime conducted by their closest relatives.

    The Inside Mind of the Terrorists

    Why were some people attracted to conduct terrorism? Why did they become terrorists? To this question, I would reply: poverty, low education, lack of affection, being depressed, and under constant oppression. Or in other words, terrorism are mostly being conducted by those who were considered as remnants of the world. Of course, for the terrorist leaders, the reasons might be slightly different, i.e. they must gain some benefits for doing terrorism, such as money and power.

    In my opinion, religion teachings (or basically any type of ideology) are not a solid reason for conducting terrorism, they might be twisted to support terrorism, but they'll never be strong enough to bring people to actually "pull the trigger". And the reason is quite simple, no reasonable man having high level of education, good flow of income, lots of affection, living his life to the fullest with minimum or no oppression at all would do terrorism acts and wasting his life in the name of a religion unless he is crazy, absent minded, having some lack of mental capacity, or being brainwashed. It just doesn't make any sense. I'm a moslem, and if a clergyman comes to me and asks me to be ready to die for the sake of a crappy holy war, I would simply reply, "no thanks sir, I believe that the heavenly girls are currently reserved for you. So you should go first, remember, they are waiting, now shoo, shoo."

    I always believe that most men will act based on the incentives provided to them, be it positive or negative, and terrorism is not free from these kind of incentives. As an example, why terrorist leaders and planners choose miserable men as their main target for brainwashing? Encouraging a miserable man to do a suicidal bombing must involve some good incentives, or else that man would not be willing to sacrifice himself. However, and this is the most important part, I'm quite certain that the costs for making a miserable man to sacrifice his life would be most likely cheaper than making a happy man to do the same act. Thus, there is a great incentive for terrorists to recruit the miserable men instead of the happy men.

    So, What are the Incentives for the Miserable Men to Conduct Terrorism?

    There are many incentives for miserable men to conduct terrorism. Being in their current state, that is having a miserable life, an option which will somehow make them a "hero" (by killing the enemy of the religion/ideology) and enable them to move to a better place (i.e. heaven, whatever the concept is) would be much appreciated. It is a general knowledge that people might experience a low mental awareness due to certain bad conditions, and during such period, the terrorist leaders will be most likely have the best chance to "brainwash" those poor people.

    Another good incentive would be in the form of financial compensation for the families left behind. You see, it is common for the family members of the dead terrorist to receive a quite generous donation from the terrorist leaders to make sure that their future life will be secured.

    Having all these kind of incentives, it is no wonder that some people would be willing to sacrifice their life. In some case, the benefit might be higher than the cost! Of course that is from the terrorist's point of view, not mine.

    How Should We Prevent Terrorism?

    We can say anything about the terrorist, saying that they are a bunch of cowards, losers, etc. But I don't think we can blame these guys entirely. Unless we can get and banish all the leaders, there is almost an unlimited supply for terrorists. It is too easy to find miserable men in any part of the Earth, there are too many people living in despair. In any case, picking one of them would not be that hard.

    So what should we do? Surely, trying to banish terrorism by advancing the life of all people would not be a viable option, because I'm afraid that we can't achieve that even until the end of time. I understand that one of the proposed solutions is to cut down the blood supply of the terrorism, i.e. money by increasing legal enforcement to money laundering activities. This is good but I would like to propose another radical, if not crazy, solutions.

    Why don't we enact a law which would "penalize" not only the terrorist, but also the closest relatives of such terrorist, i.e. parents, siblings, spouse, and children, of course provided that those terrorists have been deemed guilty based on a final and binding court decision. When I'm talking about "penalize," please don't associate it first with prison and any other type of torture. I could understand that the idea of punishing someone for the mistakes of other people is not generally accepted in this modern world (though I believe that this concept is still being recognized in some part of the world, including in some Indonesian customary laws, such as if a man conduct a certain type of crime, his family member must pay some fines in the form of cows to the village).

    The form of sanction could be many. What I'm thinking right now would be a type of sanction which would cause some financial losses such as fines or additional rate of tax, and give peer pressures such as announcement of the name of the family members to the public. The most important thing is that these sanctions must be made known publicly as wide as possible to the society.

    The Ratio for Giving Sanctions to Closest Relatives

    Why give additional sanctions to the closest relatives? There is two basic argument for this, first, miserable terrorists who choose to end their life by their own choice would be most likely have no fear of death, instead they embrace death. Thus, even the death penalty would not be sufficient to cause fear to these kind of terrorists, and in some ways, it might even strengthen their conviction to die in the name of God or whatever they want to believe, making them something like a "hero." You could easily spot this from the trial of Bali Bombers, those who are convicted as the main culprits act as if they all are ready to die, some of them even make books about their so called "struggle" for an Islamic country! This is ironic, we want to make them feel sorry for what they did, not becoming proud of it.

    That's why we should put our action to a different side, i.e. the closest relatives of those terrorist. With the current technology, it would be easy for us to find out the family member of convicted terrorists and this should be workable from practical point of view. From the terrorist view, family members are most likely important. It's human nature. Even the most cruel terrorists would not want something happen to their beloved ones. "God" might be important, but when they know that the government will target their parents, spouse, siblings and children, what will the terrorist do? Bringing all of them? For how far? Wouldn't that also limit their movement?

    By giving a threat to the family members of the terrorists, I believe we can provide the best incentive to prevent terrorism, at least this can distract them from their movement.

    Second, this policy might also provide an incentive to the rest members of the family to prevent any of their member to fall to fundamentalism trap. Since no one would like to bear the consequences of the actions of their "crazy" family member, supervision among family member should increase, and this might prevent the fundamentalism movement to spread its words. Government can not efficiently prevent fundamentalism movement, especially with the current technology. But closest relatives can, and they could actually do that efficiently, simply by putting more attention and affection to their family members, their beloved ones.

    You Know, Your Idea is Still Somewhat Crazy

    Yes, I know that this is a crazy idea. I would be glad to receive a better policy which would provide better incentives to each family in preventing their members from getting trapped by terrorist movement. So for know, I'll stick to this idea.

    But, just to make it clear, my idea focuses on using the power of incentives in preventing terrorism, and other than using legalized sanctions, I'm also interested in using peer pressure method. Maybe it would be good if we have a great marketing team who will advertise the evil of terrorism, starting by having sad testimony from the family members of the terrorist. Yes, the terrorist, not the victim, remember to focus on their loved ones first, because for most terrorists, the victim will be considered as enemies who deserve to die, so focusing on them wouldn't work best to prevent terrorism from the terrorist own perspective. Anyway, hope it's useful and can generate a better solution from the readers.
  • Making Comments on Draft of Regulations: The United States Style

    I'm quite amazed with how lawyers and law professors in the United States involved in the discussion on a new draft of securities regulation. Based on the fact that 7 big law firms would cooperate to produce a 40 page of comments, I can safely assume that the US Securities and Exchange Commission (SEC), the equivalent of Bapepam-LK, the Indonesian Capital Market and Financial Institutions Supervisory Agency, is really paying attention to the comments of practitioners. Because if they don't care, I'm certain that those law firms would not even think to waste their precious billable hours for making such comments. Or, might this be a sign that those firms have some leisure time due to the decline of their jobs? Now, I wonder when would we do the same? I know that Bapepam-LK has already started to ask for public comments before they issue a new regulation, but I haven't seen any notably public comments to such draft regulation.
  • The Conquest for Immortality and Never Ending Profits: Some Insights on The Management of Corporations

    Have you ever wished for immortality? Do you want to live forever and ever, having the luxury of doing whatever you want without any time constraint? I do, but I guess that the chance for achieving such immortality is too slim to be even considered by any rational being. However, other than any mythological creatures out there, there is an entity in this world that might actually have the capacity to achieve immortality. By this, I refer to corporations.

    What Are Limited Liability Companies?
    While the definition of corporations might slightly differ between various legal jurisdictions, it has several basic characteristics, i.e.:
    • corporations are legal entities established under the prevailing laws which have jurisdiction over such corporations (the domicile where such corporations were firstly originated);
    • corporations are able to maintain their own assets and liabilities, and to conduct various transactions with other parties;
    • corporations are "owned" by the shareholders, i.e. those who have contributed certain amount of capitals to the corporations and received shares from the corporations as evidence of their contribution and representing their ownership within such corporations;
    • there is a limitation of liabilities for the shareholders of corporations (mainly up to the respective shareholder's capital contribution in the corporation);
    • there is a separation of management within a corporation, i.e. the shareholders do not have direct management control of the corporation, instead it is conducted by a separate professional board of management (directors and commissioners); and
    • most corporations, if not all, are established for the purpose of getting profits, enabling them to maintain their existence for a very, very long time.
    The legal concept of corporations is unique, because it is considered as a somewhat "living entity" having certain rights and obligations, while in reality it is a business organization made from joint stocks owned by certain party(s). But, only because of such characteristics that corporations are able to have an immortal life and becoming an integral part of the capitalist system.

    When Was The First Limited Liability Company Established?
    According to Gower's Principles of Modern Company Law, the early concept of corporations can be found in the 15th century, notably on the limitation of liabilities of the owner of such corporations. The oldest known corporation is no other than VOC (Verenigde Oost-Indische Compagnie), the "evil" company that made a reign of terror in Indonesia, and which is also the first company to conduct public offering in this world. Since the establishment of VOC in 1606, the history of corporation has lasted for more than 400 years, and that is quite a long time indeed.

    Why People Made Limited Liability Companies?
    The logic is quite simple, corporations allow people to have the protection of limited liabilities in doing their business, they can be established for an indefinite period, and their existence does not depend on the existence of their owners. This means that it would be easier for the owners to calculate their risk of liabilities (due to the limited liabilities) and the business activities may continue even after all of the original founders have crossed to the other side, i.e. died.

    Prior to the existence of corporations, each man is liable up to all of his assets in doing business activities with other parties. Thus, if something goes wrong, he will be responsible with his entire assets, and he faces the risk of losing everything. In addition, since most of the businesses are being privately conducted by individuals in the form of self-company or partnership, the death of the particular individuals will cause the self-company or partnership ceases to exist. The introduction of corporations solves the above problems, and whoever firstly made this concept must be a genius.

    The Role of Law on the Establishment of Limited Liability Companies
    Of course, people can't simply establish an corporations and declare that they have limited liabilities to their counterparts solely by themselves, people need some legal support to do that. Without any legal basis, you can't expect people to believe that an abstract entity such as corporations exists. In order to achieve that purpose, we will need the government to step in.

    Again, this is another genius concept. By having a state law acknowledging corporations as legal entities and stipulating rules on corporations characteristics, establishment procedures, and its rights and obligations, the existence of corporations has been secured by the law, and no one can argue more on that. With the help of law, corporations are no longer abstract beings. They exist in the vicinity and they can act and enter into various transactions as if they are living persons.

    Unfortunately, the concept of corporations is not without any flaws. As we shall see further below, 400 years of existence has brought many issues that might not be considered yet when the corporation is firstly established.

    The Chase for Profits and The Impact of Immortality
    From the very beginning, a corporation was created to be a profit oriented business entity, and the management of a corporation has an obligation to ensure that such purpose can be satisfied most of the time, if not all the time. Under Indonesian laws, the management of a corporation must act to the best interest of the corporation, which can be interpreted to also include the obligation of the management to ensure that the corporation can obtain sufficient income and profits for maintaining its going concern status, i.e. the ability of the corporation to continue functioning as a business entity for certain period without any threat of stopping or being liquidated.

    So, the obligation of the management of a corporation to pursue profits is not a trick made by some evil businessmen, rather it is an obligation stipulated by the law itself. This brings us to an important issue. You see, by having the ability to live an eternal life, there is no limit for corporations in obtaining profits. And since it can't aged, the shareholders would expect the corporation to survive in any kind of condition for as long as it can be. To give incentives to the management, huge salaries and bonuses were given for those who were succeed to make the corporation profitable enough for the shareholders and for those who were failed, losing their position might be the smallest consequence. With this kind of approach, it is no wonder that in some cases, the lust for profit can evolve to a dangerous lust for everything as greed controls the management of such corporation, and when that happens, all would be fair and square enough as long as their lust can be satisfied. VOC would be a pretty example, among with various famous crumbled corporations like Enron and WorldCom.

    Can we blame them for that? Not entirely, because whether you like it or not, it is their legal obligation to secure those profits, even if they need to trick everybody. In addition, as I've mentioned above, they were paid by a huge salary and bonus to ensure that the corporation is always profitable for the shareholders. So, do we have some clear incentives for the management to do otherwise? My guess is not, since while some penal sanctions and fines might be a threat to the management, as long as their compensation is highly enough to cover the risks of being sanctioned due to their actions, there would always be a incentive for them to take such risk. As mentioned by Gary Becker, an American Nobel Laureate, crime only happen because it "does pay." See his paper here for more information.

    Proposed Policies
    Then, what should we do? What kind of policy that should be implemented to solve this problem? First of all, any kind of solution that restricts the corporations ability to obtain profit would be horrendous and will not be accepted. Or can we try the policy used by the US Government with respect to companies that receive US Government's aid, i.e. giving some limitation to the amount of the salaries and bonuses that can be obtained by the management?

    My reply is no. The Government shouldn't regulate on the maximum amount that can be obtained by the management. How can they know how to calculate the performance of each member of the management? How can they know that the payment of such huge salaries and bonuses are exceeding the fair limit? A policy like that might give a negative incentive to the management for not doing their best simply because they see that their good results will not be as rewarding as it might be if such regulation does not exist.

    Having said the above, my proposed policy would be as follows:

    1. Determination of the form and amount of salaries and bonuses of the management should be conducted by an independent committee within the corporations. This has been done in several Indonesian publicly listed companies, but have not been yet stipulated in a clear regulation. There is of course some additional costs for having this committee but there is also a good ratio for having this committee, i.e.: (i) ensuring that the management can receive a fair reward for their performances based on the calculation of those who are being involved with the corporation, (ii) preventing the management from creating salary and bonus policy that contravenes with the corporation and/or shareholders interests, such as giving excessive shares options with low price to themselves as their bonuses, and (iii) helping the shareholders who are not involved in day to day business activities of the corporation in understanding the performance of the management and how they should be rewarded.
    2. The sanction for the management who breach the laws for the sake of getting profits should be higher than or at least equal with their overall compensation (this include their salaries, bonuses and any type of incomes that they receive due to their illegal acts). This proposed policy is made based on the following assumptions: (i) if their compensation is low, there would be less incentives for them to breach the law; and (ii) if the compensation is high, they will face the risk of losing such compensation or even a bigger amount if they're breaching the law for getting good performances or else for benefiting themselves. As an example: "if the management is deemed guilty for conducting certain amount of crimes, they would need to pay an amount equal to triple times of their total annual salaries and bonuses that they received for the preceding years." Of course, this policy would be only effective if there is a high rate of legal enforcement, something that might not be achieved efficiently as of today.
    While some elaborations and implementing provisions are definitely needed for the above policies, I do hope that the ideas presented here can contribute to the development of better policies in managing the balance between lust for profit and the business sustainability of corporations.

  • The Protection of Criminal Suspects in Law and Economics Perspective

    Forthcoming in Jurnal Teropong Edisi RUU KUHAP 2015 | 23 Pages | Posted: 10 May 2015 | Date Written: April 28, 2015

    Public Choice Theory and its Application in Indonesian Legislation System

    24 Pages | Posted: 8 Oct 2012 | Last revised: 8 Nov 2014 | Date Written: October 8, 2012

    Special Purpose Vehicle in Law and Economics Perspective

    Forthcoming in Journal of Indonesia Corruption Watch, 'Pemberantasan Kejahatan Korupsi dan Pencucian Uang yang Dilakukan Korporasi di Sektor Kehutanan', 2013 | 15 Pages | Posted: 22 Aug 2013 | Date Written: August 18, 2013

    Legal Positivism and Law and Economics -- A Defense

    Third Indonesian National Conference of Legal Philosophy, 27-28 August 2013 | 17 Pages | Posted: 22 Aug 2013 | Last revised: 3 Sep 2013 | Date Written: August 22, 2013

    Economic Analysis of Rape Crime: An Introduction

    Jurnal Hukum Jentera Vol 22, No 7 (2012) Januari-April | 14 Pages | Posted: 12 Nov 2011 | Last revised: 8 Oct 2012 | Date Written: May 7, 2012


    As the author of this site, I am not intending to provide any legal service or establish any client-attorney relationship through this site. Any article in this site represents my sole personal opinion, and cannot be considered as a legal advice in any circumstances. No one may use or reproduce by any means the articles in this blog without clearly states publicly that those articles are the products of and therefore belong to Pramudya A. Oktavinanda. By visiting this site, you acknowledge that you fully understand this disclaimer and agree to fully comply with its provisions.