Basic Duties of Corporate Directors
Items in Blue Font have been taken from the book “Corporate Director’s Guidebook, Fifth Edition” Published by ABA, ISBN: 1-59031-850-1.
According to Delaware law:
“The standard for assessing a director’s potential personal liability for failing to act in good faith in discharging his or her oversight responsibilities has evolved beginning with our decision in Graham v. Allis-Chalmers Manufacturing Company, through the Court of Chancery’s Caremark decision to our most recent decision in Disney.” – Stone v. Ritter (911 A.2d 362)
Duty of Care: Avoid gross negligence. A director’s duty to exercise an informed business judgment is in the nature of a duty of care, as distinguished from a duty of loyalty. Van Gorkum 488 A.2d 858 (Del. 1985). Be informed, make decisions. Make necessary time commitments to the role of director. Be prepared and ensure regular attendance at board and committee meetings.
Duty of Loyalty: “[a] director cannot act loyally towards the corporation unless she acts in the good faith belief that her actions are in the corporation’s best interest.” Stone v. Ritter, citing Guttman. A director must act in good faith, avoiding a conflict of interest. Acting in fairness to the corporation. Avoid financial conflicts of interest. Avoid disloyalty. (See Guth v. Loft 5 A.2d 503, “not permissible to use [director] position….) This duty of loyalty is heightened when Revlon duties apply (Revlon held that directors must seek the best sale price, maximizing shareholder profit due to sale of corporation.)
Duty of Good Faith: Depends on jurisdiction. Can be equal to or just an aspect of duty of loyalty.
-
A director shall discharge the duties of the position of director in good faith, in a manner the director reasonably believes to be in the best interests of the corporation, and with the care an ordinarily prudent person in a like position would exercise under similar circumstances. (Minn Stat. 302A.251. Standard of conduct, Subdiv. 1. Standard; liability.)
- Del. Stat. 102(b)(7) may exculpate breach of duty of care but NOT a failure to act in good faith.
Fiduciary Duty: Loyalty with Good Faith built-in.
Business Judgment Rule: a standard of judicial review in analyzing director conduct; presumes disinterested directors acted on informed basis w/ honest belief that action taken was in best interests of corporation.
- “[T]he concept of gross negligence is … the proper standard for determining whether a business judgment reached by a board of directors was an informed one.” Van Gorkum 488 A.2d 858 (Del. 1985)
-
These standards require the directors to determine the best interests of the corporation and its stockholders, and impose an enhanced duty to abjure any action that is motivated by considerations other than a good faith concern for such interests. Unocal, 493 A.2d at 954-55
Duty to Monitor:
“The standard for assessing a director’s potential personal liability for failing to act in good faith in discharging his or her oversight responsibilities has evolved beginning with our decision in Graham v. Allis-Chalmers Manufacturing Company, through the Court of Chancery’s Caremark decision to our most recent decision in Disney.” – Stone v. Ritter (911 A.2d 362)
Director duty includes Risk and Compliance Oversight: Directors should assess whether the corporation has established and implemented programs to address:
- Risk Management: the board or a committee receives reports on programs to protect assets and reputation of the corporation. Typical risk management programs include information security, crisis management, plant security, compliance, IP protection
- Compliance with laws and regulations: Oversee management responsibilities, review written policies, establish audit committee, monitor programs for effectiveness
“. . . only a sustained or systematic failure of the board to exercise oversight–such as an utter failure to attempt to assure a reasonable information and reporting system exists-will establish the lack of good faith that is a necessary condition to liability.” In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d at 971.
