The Duties of a Board of Directors
Many startups are unfamiliar with corporate formalities, and often ask what duties the board has to the company and to the shareholders This article addresses some of the duties of the board.
Board’s Fiduciary Duties
Directors owe fiduciary duties towards the shareholders and the company they manage. The fiduciary duties are made up of two main components: the duty of care and the duty of loyalty. If there is a possibility of breach of fiduciary duty, directors are evaluated under one of three standards, listed from least to most strict evaluation: Business Judgement Rule (BJR), Enhanced Scrutiny, or Entire Fairness.
Duty of Care
The duty of care means that directors must always be well briefed in the corporation’s matters; furthermore, directors must make company decisions with care. Notably, the duty of care does not specify any singular action the board must take; for instance, the duty of care does not require directors to maximize profits or minimize taxes. The duty of care is codified in most states; it requires directors to act with a degree of care an ordinarily prudent and careful person in a similar situation would reasonably believe to be appropriate. Directors can breach this duty when they neglect to take actions in a time when an ordinarily prudent and careful person would have taken action.
In order to encourage essential risky business ventures and promote innovation without fear of potential prosecution, Delaware, and many other states, have adopted the statutory limitation of liability and indemnification.
Duties of Loyalty
Duty of loyalty necessitates the directors to render corporate decisions in good faith and with the best interest of the company and stockholders in mind instead of their own personal gain. This entails both the responsibility to actively engage in carefully informed decision-making and the need to refrain from ventures detrimental to the corporations or stockholders. Duty of loyalty breaches are more serious than duty of care breaches; most of the rules used to shield directors from breach of duty of care do not apply to a director’s failure to uphold duty of loyalty. The duty of loyalty is breached if, under the corporate opportunity doctrine, it is found that a director exploited a company opportunity for their own gain. The doctrine includes several factors to consider: (1) if the corporation is in the same line of business as offered by the opportunity; (2) if the corporation expects or has a heightened interest in the opportunity; (3) if the corporation would have been able to financially afford the opportunity if it had been presented; and (4) if the director would have breached a fiduciary duty or created conflict of interest if he or she had taken the opportunity.