The definition of ‘business judgment’
Rule the business judgment helps to protect of the Board of Directors from unfounded allegations about how it does business. Common in common law countries, the rule States that advice is given on the assumption that they acted with fiduciary standards of loyalty, prudence and care. If it is obvious that the Board of Directors has blatantly violated some major rule of conduct, the court will not consider the question of its decision or transaction.
Breaking down the ‘business judgment’
Rule business judgement suggests that the act of boards with fiduciary duties to protect company that the Board serves. Unless it can be proven otherwise, the presumption of innocence is submitted to the members of the Board of Directors. It is the protection of members of the Board of Directors from unfounded allegations against their decisions for the company. The reason of this rule is to recognize that the daily operations of the business can be congenital risky and controversial. Thus, the Board of Directors should be allowed to make decisions without fear of prosecution. Business rules the court believes that it is unfair to expect that the company’s management to make the best decisions all the time. While the courts believe that the Board of Directors acted reasonably in a particular situation, no further action will be taken against them.
Example rule the business judgment
For example, the Board of Directors of XYZ company is considering the closure of a separate product line. The profit margin on the product is constantly decreasing, and the business becomes extremely costly and will drive the revenues from other lines of business. The Council believes that it is better to concentrate on other areas of the business, and that they will have the necessary resources, if the other product was discontinued. After much deliberation, they decided to continue. Because the rule of business judgment, they are protected from persecution by people who don’t agree with their decision, or adversely affect it.