Business Judgment Rule

DEFINITION of 'Business Judgment Rule'

A regulation that helps to make sure a corporation's board of directors is protected from misleading allegations about the way it conducts business. Unless it is apparent that the board of directors has blatantly violated some major rule of conduct, the courts will not review or question its decisions or dealings.

BREAKING DOWN 'Business Judgment Rule'

The reason for this rule is to acknowledge that the daily operation of a business can be innately risky and controversial. Therefore, the board of directors should be allowed to make decisions without fear of being prosecuted. The business judgment rule further assumes that it is unfair to expect those managing a company to make perfect decisions all the time. As long as the courts believe that the board of directors acted rationally in a particular situation, no further action will taken against them.

RELATED TERMS
  1. Board Of Directors - B Of D

    A group of individuals that are elected as, or elected to act ...
  2. Directorate

    An organization headed by a director. In finance, directorate ...
  3. Dummy Director

    A person on a company's board of directors who votes and acts ...
  4. Outside Director

    Any member of a company's board of directors who is not an employee ...
  5. Inside Director

    A board member who is an employee, officer or stakeholder in ...
  6. Interlocking Directorates

    A common business practice where a member of a company's board ...
Related Articles
  1. Markets

    What Does the Board of Directors Do?

    Every public company must have a board of directors. These boards establish administrative policies including the hiring and firing of executives, the distribution of dividends, and executive ...
  2. Investing

    The Basics Of Corporate Structure

    CEOs, CFOs, presidents and vice presidents: learn how to tell the difference.
  3. Managing Wealth

    Retired Execs: How Much Do Corporate Boards Pay?

    If you have the right skill set, getting a seat on a company board can be a lucrative and stimulating way to spend some of your new free time.
  4. Personal Finance

    Evaluating The Board Of Directors

    Corporate structure can tell you a lot about a company's potential. Learn more here.
  5. Investing

    What are the fiduciary responsibilities of board members?

    Find out what fiduciary duties a board of directors owes to the company and its shareholders, including the duties of care, good faith and loyalty.
  6. Investing

    Sales Director Career Provides Daily Challenge

    Find out what you need to do to close the deal on this investment management position.
  7. Entrepreneurship & Small Business

    The Marketing Director's Pitch

    Are your shoulder's wide enough to carry a company's reputation?
  8. Managing Wealth

    How To Become A Corporate Board Member

    We look at how corporate boards are constructed, and how investors can get involved.
  9. Managing Wealth

    3 Reasons To Separate CEO And Chairman Positions

    Separating these high-profile positions can help to strengthen the overall integrity of a company.
  10. Investing

    Governance Pays

    Learn about how the way a company keeps its management in check can affect the bottom line.
RELATED FAQS
  1. Who is responsible for protecting and managing shareholders' interests?

    The average shareholder, who is typically not involved in the day-to-day operations of the company, relies on several parties ... Read Answer >>
  2. How do a corporation's shareholders influence its Board of Directors?

    Find out how shareholders can influence the activity of the members of the board of directors and even change official corporate ... Read Answer >>
  3. What is a staggered board?

    A staggered board of directors (also known as a classified board) is a board that is made up of different classes of directors. ... Read Answer >>
  4. What is the difference between a president and a chief executive officer? Can there ...

    In general, the chief executive officer (CEO) is thought of as the highest ranking officer in a company while the president ... Read Answer >>
  5. What is a call rule?

    A call rule is a rule used in the futures exchange market. It is a rule that requires the formal bidding amount of a cash ... Read Answer >>
  6. What is the difference between the rule of 70 and the rule of 72?

    Find out more about the rule of 70 and the rule of 72, what the two rules measure and the main difference between them. Read Answer >>
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center