The standard of care a director must adhere to will depend on how a reasonable person would act in similar circumstances. Factors taken into account would include the type of company involved, the size of the company, the nature of the business, the composition of the board and the work load division amongst the board and officers of the company. The standard required, however, would be different for a small company running the family business with a small number of employees compared to a large company with a large board and numerous employees. A higher standard would be expected from the director of the larger company as the role would often include more responsibility and supervision. At the very least a reasonable person in a director's position, regardless of the size of the company, would be expected to monitor the management of the company and familiarise themselves with the nature of the business and economic factors likely to impact upon the business.
Directors are, in certain circumstances, able to rely on and delegate to others.
However, willful ignorance and lack of monitoring would not be accepted by the courts. Reliance and delegation Under the Corporations Law a director may rely on the information or advice provided by an employee, professional adviser or expert, another director or officer or a committee of directors. Directors may also delegate part of their responsibilities to others but face being held responsible for their actions as if they were their own. Essentially the business judgment rule aims to protect directors from personal liability in relation to business judgments or decisions that are made in good faith, with due care, that may turn out badly. It enables directors to make entrepreneurial decisions that involve an element of risk but without the fear of their business judgments later being questioned by the court in an action for breach of duty to exercise care and diligence.