After I concluded my clerkship with Chief Justice Hasting of the Nebraska Supreme Court I moved to San Diego to begin working for a law firm. Within a month or two the executive director of Harmonium, Inc. (a non-profit company dedicated to helping at-risk children and adolescents) asked me to be on their board of directors. Prior to joining the board, I reminded myself to review the “business judgment rule” to insure that I understood my role on the board and any potential liability for the actions of the company. Since then I have been a part of several boards of directors. As an attorney, I utilize my legal expertise to help educate my fellow board members about the “business judgment rule.”
So, what is the “business judgment rule”?
In general, the business judgment rule protects the decision-making of a corporation’s director or board of directors from “frivolous legal allegations”. The director of a corporation is held to a standard of maintaining the “duty of care” and the "duty of loyalty". This means that the director should be making informed decisions with the best interests of the organization in mind. So, if a suit arises “alleging a corporation's director violated their duty of care to the company, courts will evaluate the case based on the business judgment rule.” This rule provides the director with “immunity from liability” in which “a court will uphold the decisions of a director as long as they are made (1) in good faith, (2) with the care that a reasonably prudent person would use, and (3) with the reasonable belief that the director is acting in the best interests of the corporation.” In short, the director must maintain the duty of care and duty of loyalty.
Whether you serve on your neighborhood association's board or on the board of a Fortune 500 company, please make sure you do your own due diligence on the issues presented at the board meeting in order to protect yourself from personal liability from the company or organization’s actions.