What's a Reasonable Person's Test?

When we elected representatives and give them authority to act on our behalf, it should never be "Free Reign", it should always be "Full Rein"

For example if we elect some directors to a board of a company we own or part own, they have as a part of their role a number of rights & responsibilities.

"Free rein" is probably interchangeable with "Free Reign", it has no accountability, no layers of transparency nor any need for compliance with an accepted set of policies & procedures. Only fools do that, at their own peril.

"Full Rein" is yes, go hard, think wide & outside the box. Make bold & courageous decisions by all means, but there are limitations. It must all be in the best interest of the company & its share holders. There also must be a process of review, to ensure even the most daring decisions were not reckless or fool hardy.

Remember you need some risk, without risk there can be no gains.

Full Rein allows full extension of the powers the directors or board have whilst keep their fiduciary duty intact.

Now trouble starts when shareholders misunderstand the brief they've handed their directors or committee members. The only saving grace, the only sensible mechanism to apply is the "Reasonable Person's Test" (RPT). This is recognised under the Corporations Act & by the Judiciary when corporate court cases happen.

Its not whether the decision did damage to the entity or not, that may be established & indisputable.
What the RPT does is apply a very simple test, asking simple questions. Were the actions or decisions they made the kind of actions or decisions a reasonable person would make in the same situation?

A decision or action that turns out to be wrong and/or very harmful to the company may have been the right decision to have made at the time. Having been a shareholder in this position I had to let go of the noose and concede that the wrong decision the board made was one most people would have made in the same situation, considering all the information the board had at the time.

Revenge & retribution is off the menu. There is only one outcome. Best people, doing the best they can for the company. If a board announces a radical plan or position on something, just cool your heels & give some room. Directors & higher decision makers have more information than us shareholders, they have more people in their ears, they are looking at more pressures & pulls that we cannot know about at the time. We have to cool our heels, allow some room to move and just watch a little. Yes make contact for assurances, but there maybe confidential information they cannot share until later. Later, when we apply a full Reasonable Person's Test if we have to that is. If they have Full Rein, let them have full rein and make the bold decisions they may need to make. If it goes pear shaped there's plenty of time for "the 3rd umpire to review the video"

If all else fails you'll have an AGM, the member's meeting to hold people to account. Let the delegated authority do their thing until they are clearly breaching the set protocol & boundaries or legal restrictions.

Otherwise, cool the heels, allow Full Rein and let the bold decisions unfold.

If you remove ALL RISK you very much remove all possible gains.