This question was answered by Julie Richardson of the McLane Law Firm
Question: I have been asked to serve on the board of directors of a private company. If I accept, what are my responsibilities as a director?
Answer: Directors have two fundamental fiduciary duties, the duty of care and the duty of loyalty. The duty of care requires directors to act in good faith, with the care that an ordinarily prudent person in a like position would exercise under similar circumstances and in a manner the director reasonably believes to be in the best interests of the corporation. The duty of loyalty requires that directors act in the corporation’s and shareholders’ best interests and refrain from self-dealing and other acts from which they would receive improper personal benefit or that would injure the corporation or its shareholders.
Decisions made on an informed basis, in good faith, and in the honest belief that the action is in the best interest of the corporation will be protected by the business judgment rule. To invoke this protection, directors have a duty to inform themselves of all material information reasonably available to them. The business judgment rule does not protect a director who has a personal financial interest in the transaction, lacks independence, does not inform himself of all reasonably available information, or fails to exercise due care. Instead, the director must show that his conduct meets the stricter standard of “entire fairness” to the corporation.
Directors, especially outside directors, must be mindful of their actual and perceived independence. Most directors maintain independent business judgment in performing their duties, but the true test is whether shareholders and, in the case of public companies, regulators will perceive the director’s actions to be truly impartial. Conflicts of interest quickly undermine a director’s perceived independence. A director’s personal relationship with an executive, perks and compensation, or financial relationship with the company, can all undermine actual and perceived independence.
Only an informed director can properly discharge his duties. Directors must ensure that they devote the proper amount of attention to their positions and investigate and respond to all potential red flags. Rubber-stamping management decisions or failing to conduct reasonable investigations when confronted with red flags or to respond to concerns that outside consultants, legal counsel, and auditors raise can lead to serious problems for directors.
As a director, your duties of loyalty and care are owed to shareholders, not to management. Understand that, and you’ll serve the organization well
Julie Richardson can be reached at email@example.com.
Know the Law is a bi-weekly column sponsored by The McLane Law Firm.
We invite your questions of business law. Questions and ideas for future columns should be addressed to: Know the Law, The McLane Law Firm, P.O. Box 888, Manchester, NH 03101 or emailed to firstname.lastname@example.org. Know the Law provides general legal information, not legal advice. We recommend that you consult a lawyer for guidance specific to your particular situation.