January 25, 2006
BJR and Officers
Posted by Steve Bainbridge

In my treatise, Corporation Law and Economics, I argued that officers should get the benefit of the BJR, opining that:

It is reasonably well-settled that officers owe a duty of care to the corporation. It is less well-settled that officers get the benefit of the business judgment rule. Under the ALI PRINCIPLES, the rule applies to both directors and officers. [ALI Principles § 4.01.]

Judicial precedents are divided, however. [Compare Galef v. Alexander, 615 F.2d 51, 57 n.13 (2d Cir. 1980) (holding that the business judgment rule “generally applies to decisions of executive officers as well as those of directors”); FDIC v. Stahl, 854 F. Supp. 1565, 1570 n.8 (S.D. Fla. 1994) (holding that the rule “applies equally to both officers and directors”) with Platt v. Richardson, 1989 WL 159584 at *2 (M.D. Pa. 1989) (holding that the rule “applies only to directors of a corporation and not to officers.”). At least one court claims that the former view is the majority position, rejecting an argument that “the business judgment rule applies only to the conduct of corporate directors and not to the conduct of corporate officers” on grounds that it was “clearly contrary to the substantial body of corporate case law which has developed on this issue.” Selcke v. Bove, 629 N.E.2d 747, 750 (Ill. App. 1994).]

Most of the theoretical justifications for the business judgment rule extend from the boardroom to corporate officers. Many corporate decisions are made by officers, for example, who are likely to be even more risk averse than directors. Accordingly, insulation from liability may be necessary to encourage optimal levels of risk-taking by officers. Just as the board of directors is properly regarded as a production team, so is the so-called top management team. Accordingly, internal team governance may be preferable to external review. In sum, the better view is that officers are eligible for the protections of the business judgment rule.

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