- ? Duty of care:This means a director should execute their duties with the same degree of care that a prudent person would apply under similar circumstances.
- ? Duty of loyalty:This is often defined as the director placing the interests of the company and its shareholders above his own (or his family members’) interests. If a director has an opportunity to profit as a result of being a board member, he or she mustbe able to prove that the transaction was not in any way injurious to the company and that the transaction was fair. A breach of the duty of loyalty would be considered self-dealing. Board members must disclose issues that may present conflicts of interest and, when those potential conflicts arise, board members should recuse themselves from a vote on the matter.
- ? Duty of good faith: There is some disagreement as to whether this duty should be separate from or part of the duty of loyalty. It is sometimes expressed a ?business judgment rule? where, even where attention to care and loyalty were paid, a decision turns out to be a bad one. In this case, the question becomes one of whether the board member acted in good faith and made a reasonable decision given the information available at the time. However, two Delaware court cases in the past ten years have removed some of the benefit of the doubt traditionally given board members who fail to detect corporate trouble.
In 1996, a Delaware Court of Chancery found that the directors of Caremark Inc., a pharmaceutical services company, could have been personally liable for losses at the company had they not implemented correct compliance programs. Caremark had been indicted in 1994 for violating certain healthcare laws, and was ordered to pay a $250 million penalty. Shareholders later sued the unindicted board members for failing to detect the criminal wrongdoing. William Allen found for the directors because they had established a relevant compliance system but noted that, in theory, the judgment could have gone the other way if the directors had failed to establish such a system.
More recently, the duty of good faith was given another day in a Delaware Chancery court during the suit against the directors of Walt Disney. The media giant’s board sued over an enormous severance paymentmade to outgoing president Michael Ovitz, who received roughly $140 million after serving for only a year. The case closed lastmonth on the side of the board members, putting advocates of more corporate governance on the densive. But the court’s decision merely to allow the Disney case to go as far as it did has led some legal experts to read a shift toward directors being held accountable for not seeking adequate information (and not documenting the seeking of such information) when making important decisions.
All this adds up to one reality ? directors of companies now need to prove that where corporate evil has taken place, they tried hard to hear or see it before it came to light.