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An International Meeting of American Accounting
Association
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A Critique of Director Accountability under the Business Judgment Rule |
Richard S Sathe
University of St. Thomas (St. Paul)
Brian P Shapiro
University of St. Thomas (St. Paul)
Abstract: Despite theoretical and practical knowledge of what constitutes effective governance, governance failures facilitated the largest corporate accounting scandals in history, and in most cases the directors in question have not been held accountable for negligence. This paper examines the legal, political, and economic origins of the business judgment rule’s (BJR) arguably permissive standard of director due care. Under the BJR, directors are not held liable for their actions except in cases of extreme negligence or fraud, and plaintiffs who allege director negligence have a high burden of proof. Next, the paper critiques the law and economics movement’s rationale for the BJR’s director protections. The paper then examines how special interests maintain the BJR by opposing governance reform and by controlling the selection, socialization, and incumbency of their successors in academia, law practice, and the private sector. The paper concludes with implications for future research.