Corporate directors generally are aware of the fact that they are protected by the so-called “business judgment rule”: if a director of reasonable intelligence applies reasonable diligence and doesn’t make a personal profit out of any decisions, then courts will not hold the director liable because he made a mistake.
Corporate statutes, including Delaware and Massachusetts, have long codified this rule, although they do it in a particular way: they set forth an affirmative standard of conduct for directors and then say there will be no liability if this standard is met.
What about corporate officers? They have fiduciary duties to their corporations also. Do they have the benefit of the business judgment rule? Spoiler alert: sometimes.
There is Delaware judicial authority for the proposition of the business judgment rule also applies to officers. In Massachusetts there is a specific statute in the (fairly) new General Business Corporation Act which sets forth a standard of conduct for officers which is similar to (not quite as broad as) the protection from liability afforded by that statute to directors. The supposition that officers are covered in a manner similar to directors is contrary to traditional analysis, but seems to be the judicial trend in Delaware, and in Federal courts in Florida, New York, Illinois and Georgia.
However, recent litigation in various courts has perhaps set in motion a retreat back to the limitation of the business judgment rule as protecting only directors and not officers. Cases in California decided by state (as opposed to Federal) courts seemingly now have restricted the business judgment rule only to directors. And, now director protection is under assault.
Additionally, there is more than one way to skin the cat; persons who might otherwise be protected by the business judgment rule may lose that protection by reason of the nature of the company (bank directors should be held to a different standard given the impact of a bank failure on the economy), directors must be wholly disinterested (often not true in private corporations), directors may have close family ties or business relationships which taint their judgment and deny them use of the Rule, directors may become “interested” if they are intimidated by an interested director (this from Delaware). Further, directors have been held liable if they fail to inform themselves sufficiently of the facts of the case, and directors also are now being attacked by claims made under Federal Securities Laws (the business judgment rule relates to breach of fiduciary duty at common law and not statutory transgressions).
Given the current pressure to “make individuals liable” for corporate failures, particularly in derivative law suits, you rapidly reach the conclusion that the business judgment rule is under great pressure even in protecting directors, let alone applying it to the protection of corporate officers. (Indeed, there are strong arguments that the business judgment rule should not apply to officers, who generally are more involved in company affairs and thus might be chargeable with actually reaching the correct decision, not just trying hard.)
It may be that the Massachusetts statute, codifying a statement of officer conduct similar to the standard that satisfied the parameters of the court-invented business judgment rule, ultimately will prove among the more robust judicial protections afforded to corporate executives anywhere in the country.