Directors (of the company’s Board) and senior managers (officers) are deemed to be fiduciaries of the corporation, because their relationship with the corporation is one of trust and confidence. Directors additionally have a fiduciary duty to shareholder (owners) to serve their interests. Directors may delegate some of their duties to an executive committee or to senior officers but it does not relieve them from their overall responsibilities. Directors and managers have two general duties: (1) a duty of care; and (2) a duty of loyalty.
Duty of Care. Directors and managers are supposed to be diligent and prudent on behalf of the corporation. They are supposed to exercise as much business acumen and prudence as if they were doing their own personal business (such as that of a sole proprietor). When directors delegate work to managers, they are supposed to have general oversight – otherwise they might be liable for negligence. The oversight might entail actions such as regularly having and attending board meetings, asking questions to senior managers, examining the corporation’s control systems, approving major transactions, appointing and removing senior managers, approving major financial decisions such as dividend declarations or issuance of stock or bonds, etc. Directors are expected to become reasonably informed of the nature of the business and to do what it takes to understand the business and legal advice given to the corporation.
Duty of Loyalty. Directors and officers are expected to be faithful to their obligations and duties. Through fiduciary duty, both directors and managers have to subordinate their own personal self-interest to that of the corporation and its shareholder owners. Directors and managers cannot take personal advantage of business opportunities that are rightfully that of the corporation. Directors and managers are to disclose fully any conflicts of interest that they may have.
Business Judgment Rule. Directors and senior managers may make mistakes. That is, they might direct corporate activities that expose themselves to liability both personally, and of other corporate personnel. Such liability be mitigated through the so-called business judgment rule. Directors and managers, as described above, are expected to gather relevant information and use their best judgment in making business decisions. If these decisions are made in such manner, and are within the manager’s authority, the manager is generally not liable for such decisions. That is, even if after the fact (post hoc) a business decision looks wrong such as the corporation suffers, courts generally will not rule against the director or manager if there was a reasonable basis for such decision when it was made (a priori).
Copyright 2002, Doug Schuler
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