Six Fiduciary duties of the Board of Directors
Corporations are managed by their Board of Directors. In such capacity, every director owes a fiduciary duty not only to the corporation itself, but to the owners, stockholders, of the corporation as well. In some circumstances, directors can be subjected to personal liability for breaching their du
IntroductionA director*s fiduciary duty to a corporation is regulated through a number of legal sources. Most prominent, the statutory law of the state in which the Corporation is incorporated will set forth obligations and responsibilities of boards of directors. Second, case law relating to a director*s fiduciary duty, or what is commonly referred to as *common law rules*, or judicial decisions will help guide fiduciary responsibility. Third, the corporation*s own articles, certificates of incorporation and bylaws will also lend a hand to guide the Board of Directors to outline the specific duties of its members. Last, stockholders might influence the way corporate governance is regulated.
In every business, there are three roles an individual can play within it. A person can be in management (on the Board of Directors), an owner (a shareholder), or an employee. Any individual can take on some or all of these responsibilities. It is common in a closely held corporation that a found will take on all these roles. Overall, however, corporations Board of Directors is ultimately responsible for its management. The responsibility for making decisions on behalf of the Corporation is vested specifically with the directors of the corporation, and not its stockholders.
The Board of Directors executes its responsibilities to the Corporation by appointing officers, e.g. president, vice president, treasurer, who run the day-to-day operations of the Corporation, as well as propose strategies and objectives, and implement the corporate plans. In addition, the Board of Directors will supervise these officers and make major decisions for the Corporation. Major decisions are things like significant joint ventures, licensing intellectual property, or selling significant assets. In many instances, members of the Board of Directors will be selected because of their expertise in a particular area or industry related to the Corporation. In such capacity, such directors might hold an advisory or supervisory role over the officers.
The Duty of Care and the Duty of LoyaltyThere are two primary fiduciary duties every director owes to the corporation and its stockholders. Those are the duty of care, and the duty of loyalty. Conversely, a corporation itself does not oh fiduciary duties to the stockholders and similarly cannot be held to have assisted a director with any breach of his or her duties. In addition, the director may owe other duties stemming from a corporation*s bylaws, ethics policies, or other governmental entities.
A director must act with the care that a person in a like position would reasonably believe appropriate under similar circumstances. This is called the duty of care. generally, the duty of care is defined as the obligation to use the amount of care which an ordinarily careful and prudent person would use in similar circumstances a director could also breached his duty of care if he fails to take action in a situation where a careful person would normally have taken such action. For example, the Corporation commits a crime, a director could become liable for failing to stop the crime if he failed to attend meetings, monitor management decisions, or in any other way failed to take action.
It is generally recognized that directors, in many circumstances, must take business risks in an effort to promote the best interests of the corporation and its stockholders. Typically, judges and stockholders are not in the best position to second-guess the business decisions made by boards of directors. As such, many states follow the business judgment rule which presumes that a director complies with the duty of care. This rule presumes that the Board of Directors acted on an informed basis and in the honest belief that the action was taken in the best interest of the Corporation. The Board of Directors must be informed about the Corporation and its decisions. They should be made aware that they are required to participate in board meetings and rely on information and opinions from consultants, management and employees. When acting in good faith, the decision-making process must be substantive and cannot just be a rubberstamp management decision. Last, when acting in the best interests of the corporation, the directors must reasonably believe the action or transaction was made in the best interests of the corporation. Some states apply a standard of *gross negligence* to determine if a Board of Directors breached its duty of care.
Duty of Good FaithThe duty of loyalty requires that directors act in good faith for the benefit of the corporation and its shareholders and not for their own personal interests. Decisions or transactions where a conflict of interest might be involved will not be protected by the business judgment rule. Generally, if the directors have a personal interest in an action of the Corporation, courts will typically presume that the directors did not act in the best interest of the Corporation.
The duty of good faith is not itself a separate fiduciary duty but is a combination of the duty of care in the duty of loyalty automatically imposed. A director acting in good faith will be acting with honesty of purpose and in the best interests of the corporation the really isn*t a single definition or set of factors that exists that defines good faith or bad faith. However, courts have identified several situations that usually involve bad faith. By way of example, a director who intentionally fails to act in the face of a known duty to act and demonstrates a conscious disregard for his own duties. as previously mentioned, knowing that a corporate policy is being violated in making no attempt to change the situation. Similarly, a director knowing that the Corporation is violating the law it is doing nothing about it. Finally, the director acting for any purpose other than advancing the best interests of the Corporation or its stockholders a good example here is a director who approves the sale transaction of the corporation because he wants to sell his own stock.
The Duty to Obey the law, The Duty of Oversight, and The Duty of DisclosureOther less common duties owed by the Board of Directors include the duty to obey the law, the duty of oversight, and the duty of disclosure. Basically, directors have a duty to comply with the law. If a director knowingly breaks the law, the directors denied the protection of the business judgment rule and cannot benefit from limited liability. Further, a director who knowingly violates the law will be seen to have acted in bad faith. Breaking the law for the benefit of the Corporation is not an excuse. Further, a corporation can be held accountable for the actions of its management and its employees. Because the Board of Directors is generally charged with overseeing the managers and employees on behalf of the Corporation if the board fails to appropriately manage the managers and employees, the directors can be accountable. Last, directors are responsible for communicating honestly and openly with the stockholders of the corporation and to make full and fair disclosures. The duty of disclosure has also been referred to as the duty of candor.
SummaryTo summarize, here are the six fiduciary duties a director owes to the Corporation:
1. duty of care
2. duty of loyalty
3. duty of good faith
4. duty to obey the law
5. duty of oversight
6. duty of disclosure/candor
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