Application of The Business Judgment Rule

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A business judgment rule and its application

A business judgment rule is the review standard that various courts apply in determining whether a given director has breached the conduct standard as stipulated by the duty of care. The conduct standards under duty of care consist of the inquiry duty, monitoring duty, duty of making reasonable decisions, and the duty to utilize some thoughtful process in making the decisions.

The importance of the business judgment rule

I agree with the manner in which the business judgment rule has been applying as it helps in ensuring the rights of the directors are protected. The business judgment rule facilitates the protection of the directors from being held liable for the decisions they make in utmost faith and after following a dully laid down process of applying all the relevant information (Stout, 2013). The application of the rule has shielded the directors from unnecessary lawsuits that might have arisen because of negative consequences that might have resulted from their decisions. The use of the law in a present manner has also served as an encouragement for the directors to serve and taking risks as they carry out their duties. The holding of the directors liable would have deterred many people from being appointed as directors in various companies, thus might have had many negative consequences on the growth of the corporate sector.

Protection of the governance role of the board

The rule has also helped in ensuring the preservation of the role of the board as the central-making organ in the governance of the corporates. I also agree with the manner in which the rule has been applied as it has helped in ensuring there is no judicial encroachment in the decisions made by the business or companies (Stout, 2013). The judges are not business experts and might not be well-equipped in analyzing the rationale behind all the corporate decisions made by the directors. The manner of application of the rule has also facilitated the preservation of the governance role of the board as it is stipulated in the statutory. The shareholders have the power to elect their directors hence they should live with the given decisions made by the board whether good or bad until they have the next board meeting where they are at liberty to drop them.

Distinction between board directors and officers

The rule should not be applied to the officers as they are engaged in the daily running of the company as opposed to the board directors. The directors only intervene on some significant or key issues while the officers possess the sole mandate of managing the company daily. They apply duty delegation authority from the board in determining and formulating policies and provision of the overall corporate direction. They develop some business strategies, set company goals, manage the risks and the coordination of the operative activities. The officer's management functions are very distinct from those of the board. The rule should, therefore, not apply to the officers as they run most of the operations, and they make strategies with full access to information as compared to the board that usually ratifies only some significant decisions.

Responsibility of officers and their access to information

The officers also have a full-time commitment, higher compensations, and easier access to the company information as compared to the directors who mostly meet whenever there is a crucial decision to make. The officers also enjoy higher pay hence they should be liable for any risk they make because they are in a better position to make sound decisions as compared to the directors due to their expertise, access to information, and they manage every aspect of the company. The directors only demand some information where necessary in the fulfillment of their monitoring and management duties. Therefore the ability to request the data cannot put them in the same position as the officers because any information they are provided with is either created or developed by officers or produced under the officer's direction (Ubelaker, 1981). Therefore, the officers bear much responsibility for any decision made as they always act as the source of information that the directors rely on in making the decisions. The statutory treatment that allows the directors to base on the information supplied by the officers underscores the easier access of information by the officers hence the rule should not be applied to them.

Retention of the business judgment rule

The rule should be retained as it has much impact on the management of the corporates world. The rule helps in ensuring the board directors are shielded from being sued by the company shareholders for any risk decisions made that result in a loss by the given company (Manning, 1984). The rule should also be retained as it helps in clarifying the dully laid down process of corporate decision-making and the violations that might necessitate the upholding of the liability to the directors. The clarity aids in ensuring the board directors are not victimized based on mere allegations. The rule protects the rights of the directors thus encouraging the growth of the corporate sector, as people do not fear taking risks. In the future, the doctrine will be used as a reference when amending the laws to conform to the existing business dynamics that will be existing at that time.


Manning, B. (1984). Business Judgment Rule in Overview, The. Ohio St. LJ, 45, 615.

Stout, B. J. (2013). Corporate Directors [and Officers] Making Business Judgments in Tennessee: The Business Judgment Rule. U. Mem. L. Rev., 44, 455.

Ubelaker, M. H. (1981). Director Liability under the Business Judgement Rule: Fact or Fiction. Sw. LJ, 35, 775.

January 19, 2024

Business Economics Law


Corporations Management

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