What is the business judgment rule?

The business judgment rule is a fundamental principle in corporate governance that protects directors and officers from liability for decisions made in the course of managing a corporation, as long as those decisions are made in good faith, are informed, and are within the scope of their authority. It recognizes that directors are entrusted with significant discretion in managing corporate affairs and should not be held personally liable for decisions that may turn out poorly, as long as they acted with appropriate care and loyalty to the corporation's best interests.

This principle encourages directors to take necessary risks and make business decisions without the fear of being second-guessed by courts, as long as their actions reflect sound judgment and are made with honesty and prudence. The business judgment rule thereby serves to foster a conducive environment for business effectiveness and strategic decision-making.

In contrast, ensuring profitability, guidelines for business mergers, and standards for employee evaluations do not adequately capture the essence or purpose of the business judgment rule. The rule is specifically tied to the liability protection of directors in the context of corporate decision-making, underscoring the importance of their discretion and judgment in pursuing the company's objectives.