Q:What are the legal and fiduciary responsibilities and liabilities of a member of the board of directors for a corporation?

Answer:

In light of recent events with Enron, WorldCom and others, legal and fiduciary responsibilities of directors are important to understand. Below I discuss the traditional legal concepts of director responsibility. However, be sure to check with your attorney when putting procedures and policies in place for your corporation. State law differences and the passage of new regulations--such as the Sarbanes-Oxley Act of 2002--demonstrate how the law changes frequently and varies considerably.

Duty of Care

Directors have a duty to use the care and skill that an ordinary prudent person would use in similar circumstances. Directors are expected to act in accordance with the law and in accordance with the corporate articles and bylaws. Except for lawyers, accountants or other professionals who are held to the standards of their profession, directors generally are not held to higher standards than ordinary people. Directors are typically entitled to rely on information provided by other sources--management, officers, counsel, experts and so on--who they reasonably believe to be competent. If a director has knowledge of incompetence or relies on someone he or she unreasonably believes to be competent, a director may be liable.

Business Judgment Rule

In making decisions, a director is expected to act in accordance with the Business Judgment Rule. Depending on your state, the standards of the Business Judgment Rule will vary. Generally, it requires that directors be reasonably informed and rational in their decisions on behalf of the corporation. In other words, if an ordinary person in good faith and in the best interests of the corporation might have made the same decision, directors are not liable because their choice turned out poorly.

Duty of Loyalty

Directors also have a duty of loyalty. This duty arises when directors are making decisions that affect them personally, such as deciding their own compensation, granting themselves stock, doing business with the corporation, or decisions regarding their relatives or entities in which they have any interest doing business with the corporation.

For these, the director must:

• Make fair and full disclosure to the other members of the board about his or her conflict of interest on the matter.
• Act in good faith in the best interests of the corporation.
• Even if the first two are satisfied, the matter must also be fair to the corporation in services, products or compensation received by the corporation.

Some states may require that such matters be approved by a majority of disinterested directors or be approved by the shareholders upon disclosure. State law will determine how strictly these factors are applied in different circumstances.

Corporate Opportunity Doctrine

Directors and officers may also be liable for taking advantage of business opportunities without first notifying the corporation of the chance to act. There are numerous, varying standards in determining liability under this doctrine. However, a court may consider whether or not the opportunity was within the corporation's scope and kind of business and whether or not the corporation had an actual or expected interest in the matter.

All answers are general in nature, not legal advice and not warranted or guaranteed. Readers are cautioned not to rely on this information. Because laws change over time and in different jurisdictions, it is imperative that you consult an attorney in your area regarding legal matters and an accountant regarding tax matters.

1 Readers are cautioned not to rely on this article as legal advice as it is
no substitution for a consultation with an attorney and an accountant in your state. Based
on jurisdiction and time, the law varies and changes.