Final answer:
The business judgment rule is a legal principle that protects corporate directors and officers from personal liability for decisions made on behalf of the corporation.
Step-by-step explanation:
The business judgment rule is a legal principle that protects corporate directors and officers from personal liability for decisions made on behalf of the corporation. It assumes that directors and officers act in good faith, in the best interests of the corporation, and with the reasonable belief that their actions are within their authority. Under this rule, courts will generally defer to the business judgment of directors and officers and will not second-guess their decisions as long as they were made in an informed and rational manner.
For example, if a Chief Marketing Officer makes a decision that ultimately leads to financial loss for the company, but the decision was made after conducting thorough market research, consulting with experts, and considering all the available information, the business judgment rule would protect the officer from personal liability if sued by shareholders for negligence. The rule recognizes that business decisions involve inherent risks, and directors and officers should have the latitude to make those decisions without the fear of being held personally accountable for every unfavorable outcome.
The business judgment rule is an important principle in corporate governance and encourages directors and officers to take calculated risks for the benefit of the corporation. It helps maintain a balance between accountability and the freedom to exercise judgment in making business decisions.