Should the statutory business judgment rule apply to directors’ oversight responsibilities and compliance decisions?

This note considers the scope of the term ‘business judgment’ in the statutory business judgment rule (‘the rule’) set out in s 180(2) of the Corporations Act 2001 (Cth). While the interpretation and impact of this sub-section has been debated in scholarly journals, that debate has focused on other elements of the provision rather than on the definition of the term ‘business judgment’. However, in the public sphere the scope of this term has been strongly criticised by the Australian Institute of Company Directors (AICD). The AICD’s concerns are twofold. First, it is disappointed that s 180(2) does not apply to directors’ responsibilities to monitor and oversee companies’ financial position and general business activities. Second, the AICD takes issue with the exclusion of a directors’ judgments as to whether or not a company should comply with the law. These criticisms form part of the argument underlying the AICD’s campaign for the introduction of an ‘honest and reasonable director defence’: a proposed statutory defence that the AICD argues would be more effective than s 180(2) in reassuring directors that they can take reasonable entrepreneurial risks without fear of attracting personal liability. After providing some brief background context, this note considers each of these criticisms from both a legal and a policy perspective.