Serving on a Board of Directors – Part 2 – Duties, Responsibilities and Exposure

In Part 1, I suggested that, before you agree to serve on a Board of Directors, you ask some very fundamental but important questions to determine whether you should serve on that particular Board and what the actual and potential ramifications of doing so might be.

In Part 2, I want to be a little more technical (which is somewhat out of character for this blog) by making you aware, at a very basic level, of the legal duties and responsibilities of Directors.  Briefly, those duties and responsibilities (in my words), and certain related relevant concerns and standards for Directors, can be summarized as follows:

• Duty of Care – Directors must act with the care that a similarly situated person in a similar circumstance would reasonably believe to be appropriate.  This includes a duty to be informed, to prepare for and attend meetings, to candidly share information and opinions with other Directors and company management, and to make appropriate inquiries into company matters.  In meeting the duty of care, Directors may reasonably rely on others, such as the Corporation’s attorneys, accountants, outside auditors, etc.

• Duty of Loyalty – Directors need to act in “good faith” and in a manner that they reasonably believe is in the Corporation’s best interests.  This includes, among other things, avoiding, and where necessary disclosing, conflicts of interest, and making “corporate opportunities” available to the Corporation.

• Duty of Disclosure – Directors have a duty to inform their fellow Directors and (in appropriate circumstances) the Shareholders of the Corporation of information that is relevant to corporate decisions, and not to mislead.

• Business Judgment Rule – The business judgment rule is not a separate duty or responsibility; it’s the standard by which Directors’ decisions and actions are measured.  Generally, Directors are presumed to have acted in good faith, on an informed basis and with the honest belief they were acting in the Corporation’s best interests.  If this is the case, a court will not second-guess the Directors’ decisions.

• Confidentiality – Generally, Directors must maintain all non-public information regarding the Corporation in confidence.

Before you agree to serve on a Board, and throughout the time that you serve on a Board, make absolutely certain that you understand the above duties and responsibilities.  If in doubt, speak with the Corporation’s legal counsel, and where necessary, with your own personal counsel.  These duties and responsibilities cannot be taken too seriously.

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