Directors and decisions – behaviour not “tick-boxes”

Unpacking the Business Judgement Test.

The business judgement test is a very elegant yet challenging part of many corporate legal frameworks. In a  nutshell it requires directors to behave in a certain way in order for their defence to stand – i.e. it provides a set of fairly simple criteria to determine (judge) whether what they were dong in a certain situation was correct or not, carried liability or didn’t.

In brief the business judgement test applies 3 straightforward filters to this decision of how to judge the behaviour of directors and decision makers;

  1. Did the director know what they were doing? In other words did they have the requisite knowledge and information – and if not did they do something about it. Did they request more information, find an expert, do research etc to have provided them with the information. This will also be extrapolated from qualifications, experience etc;
  2. Was the director conflicted? Was there a conflict of interest that could have impacted on the decision? The concept of conflict is also very broad as a conflict does not only exist if the director is personally conflicted but also if someone close to the decision maker (spouse, close relative, associated company etc) is also conflicted. The remedy for conflict is declaration and recusal  – each and every time;
  3. In whose interests was the decision made? Directors are legally obliged to put their own personal interests aside when making company decisions – they are obliged and required to make decisions in the best interests of the company. They cannot be swayed by either their own “other” interests or by some other parties “other” interest – and most of all this needs to be demonstrated in the record of the discussion and decision.

All three of these “boxes” need to be “ticked” for a defence to hold. The challenge is that all three of these “boxes” are not structural in nature but behavioural in nature. They impact not on how companies are structured but on how decisions are made. These three criteria need to be built into how directors and decision makers make their decisions – since the defence needs to be built as decisions are made, and cannot be built after the fact.

So how should decisions be made? Here are some ideas…

  • The directors and decision makers of an organisation need to design a decision making process that builds the business judgement test into it – and apply it to EVERY decision they make;
  • Everyone involved in the decision needs to first examine themselves to see whether they are comfortable that they actually know what they are deciding about;
  • The source and scope of information needs to be examined to see whether it is accurate, complete and sufficient to make a decision;
  • Everyone needs to declare whether they are conflicted or not, and whether they are close to anyone that is conflicted;
  • The decision needs to be “stress tested” to examine exactly whose interests it is benefiting;
  • Records need to be kept of each and every step in the process.

Please let me know what other steps you would consider critical in a decision making process – use the comments below…

Leave a Reply

Your email address will not be published. Required fields are marked *

%d bloggers like this: