Question

The business judgment rule is important because it reflects the principle that ________, not _________, have the greatest latitude to run companies.
a. shareholders; company directors
b. managers; company directors
c. shareholders; managers
d. company directors; shareholders

Answer 1

Answer: d. company directors; shareholders

Explanation: The conduction and management of a business usually involve making controversial decisions or taking actions that might put the business at risk. In a general sense, greater profits calls for greater risks. As such, the business judgement rule states that the board of directors should be allowed to make such decisions without fear of prosecution by shareholders who might object while acknowledging that managers are not capable of making optimal decisions at all times. The rule therefore aid in protecting a business's board of directors from slight legal allegations about the conduct of business. It is thus important because it reflects the principle that company directors, not shareholders, have the greatest latitude to run companies.