The social cost of due care in business judgment

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This article considers whether it is justifiable to reduce damages where directors are liable for business failure. It argues that holding directors liable for all damage due to business failure prevents individual directors from doing business enterprisingly. According to a cost-benefit analysis, the fear of potential liability results in excessive costs when business decisions are made. The total costs that individual directors expend in making business decisions is smaller than the total costs of the company as the company’s costs includes not only directors’ costs but also other employees’ costs. In comparison, the total amount of loss that individual directors may suffer due to a business failure is far larger than the total loss of the company, where the directors are liable for the total loss of the company jointly and severally. It is because the directors would also suffer salary reduction or discharge. Under these circumstances, the directors should pay close attention in order not to err in their business judgment. Thus, even where risks are minimal, directors may act too cautiously and passively, rather than pursue a more profitable entrepreneurship aggressively. Therefore, the simple compensatory principle may not be adequate where business failure occurs