AICD commissioned research: Time to reconsider Australia’s business judgment rule

To understand the efficacy of Australia's business judgment rule (BJR) and whether reform is needed, the AICD commissioned Allens to research the scope, operation and effectiveness of Australia’s BJR as compared with other jurisdictions.

Australia’s BJR was adopted two decades ago to protect directors who undertake reasonable and informed commercial decision-making from breach of directors' duties claims, however it has found limited use. This may be because the form it takes renders it less effective than comparable protections in peer countries. 

Some notable findings from the research include: 

• Australia’s business judgment rule provides less protection to directors than those of comparator jurisdictions, including because it attaches only to the duty of reasonable care, skill and diligence, (whereas the comparator jurisdictions’ rules have varying degrees of relevance to other duties);
• Australian commentators are more dissatisfied with the performance of the Australian business judgment rule than are their comparator jurisdiction peers, including because of a view that it is of little real assistance to directors in litigation, and is not actually performing its intended function of encouraging risk-taking in business; and
• current developments in the Australian director liability environment accentuate perceived shortcomings of the Australian business judgment rule. For example, if the doctrine of stepping stone liability continues to expand, a broader range of corporate decision-making may be reviewable as a potential contravention of the directors' duty of skill, care and diligence in Australia.

This research complements previous analysis undertaken by Allens in 2020 on the frameworks for imposing criminal and civil liability on directors in Australia and comparative jurisdictions, which concluded that Australia’s environment is uniquely burdensome.