How does a board of directors protect or benefit a business and what are their duties?

A board of directors is often found in the large corporate setting, but can also be found in smaller businesses.  The board is elected by the shareholders and is in charge of making the big picture, long-term decisions for the business.  The board in turn hires the officers of the company who run the day-to-day operations of the business.  A board is usually made up of any number of directors (who hopefully have diverse backgrounds) in order to help guide the company from unique perspectives.

 

The following is a non-comprehensive list of things that a director should do in order to “discharge their duties in good faith, with a degree of diligence, care and skill which ordinarily prudent men would exercise under similar circumstances in like positions.” See N.Y. Bus. Corp. Law § 717.

–       Directors owe a degree of care that a businessman of ordinary prudence would exercise in the management of his own affairs.

–       Directors should always act honestly and in good faith.

–       Directors should act with reasonable care based upon the type of corporation, its size and its financial resources.

–       Directors should acquire at least a rudimentary understanding of the business and of the corporation.

–       A director should become familiar with the fundamentals of the business in which the corporation is engaged.

  • Directors must exercise ordinary care, and thus cannot use the defense of a lack of knowledge needed to exercise the requisite degree of care.
  • If a director feels that they don’t have sufficient business experience to perform their duties, they should either acquire that knowledge though inquiry, or not act.
  • A director present at a board meeting is presumed to concur in a corporate action taken at the meeting unless his dissent is entered in the minutes of the meeting or filed promptly after adjournment.

–       Directors have a continuing obligation to keep informed about the activities of the corporation.

–       Directors may not shut their eyes to corporate misconduct.

  • Upon discovery of an illegal course of action, a director has a duty to object ,and if the corporation does not correct the conduct, to resign.
  • Sometimes, depending on the situation, a director may be required to seek the advice of counsel
  • A director may have a duty to take reasonable means to prevent illegal conduct by co-directors; in any appropriate case, this may include the threat of suit.
  • A director can absolve themselves from liability by informing the other directors of the impropriety of specific decisions or actions and voting for a proper course of action.
  • Conversely a director who votes for or concurs in certain actions may be liable to the corporation for the benefit of its creditors or shareholders, to the extent of any injuries suffered by such persons, respectively, as a result of such action.

–       A director’s management of the company does not require a detailed inspection of day-to-day activities, but rather a general monitoring of corporate affairs and policies.

–       Though not required to audit corporate books, directors should maintain familiarity with the financial status of the corporation by a regular review of financial statements.

–       Generally directors are immune from liability if, in good faith, the rely upon the opinion of counsel for the corporation or upon written reports setting forth financial data that are prepared by an independent public accountant, or rely on accounts or reports represented to them to be correct by the president or officers of the corporation.

–       A director’s duty of care does not exist in the abstract, but must be considered in relation to specific obligees: as a fiduciary to the stockholders.

  • Shareholders have a right to expect that directors will exercise reasonable supervision and control over the policies and practices of a corporation.
  • The institutional integrity of a corporation depends upon the proper discharge by directors of those duties

Francis v. United Jersey Bank, 432 A.2d 814 (N.J. 1981).

 

Contact your local counsel to determine what a director’s duties and obligations are, for your specific company or industry.

 

Photo By: Moyan Brenn