The ‘North Star’ Guiding The Conduct Of Directors

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Directors have to devote the time and the care to ask questions and feel empowered to weigh in on business decisions.

Amid the revival of stakeholder capitalism and the continuing rise of the environmental, social and governance (ESG) movement, directors’ fiduciary duties are even more pivotal in protecting not only the company and its investors but also its employees, suppliers and customers. Three critical laws guide the conduct of directors, setting the ‘North Star’ for good corporate governance. The business judgment rule helps to ensure that directors act in the best interest of the company and its stakeholders, while duty of care and duty of loyalty establish essential obligations for directors when making business decisions.

Under the Delaware General Corporation Law in Delaware, where many public companies are incorporated, duty of care requires directors to make informed business decisions based on all available material information. Duty of loyalty, on the other hand, requires directors to act in good faith to advance the best interests of the corporation and to refrain from conduct, such as self-dealing, that harms the corporation. Meanwhile, at the center of Delaware General Corporation Law is the business judgment rule, which affords directors making business decisions a set of presumptions that, so long as a majority of the directors have no conflicting interest in the decision, their decision will not later be second-guessed by a court if it is undertaken with due care and in good faith.

Understanding the obligations under Delaware General Corporation Law, receiving updates on Delaware Chancery Court decisions, and reviewing these concepts in light of the board’s strategy and plans is critically important for every director. Directors need to think about and understand these concepts prior to facing them in the boardroom. Some of the essential elements for directors to learn about the duty of loyalty are identifying perceived conflicts and having a process in place at the board level to communicate those conflicts with the corporate secretary and the general counsel, receiving guidance and potentially recusing oneself if necessary. For example, directors may have a general discussion of strategy or M&A, and may sit on boards, but may not know the full import of their businesses. Discussing it with the general counsel can help directors understand whether there’s a real conflict, where management intends to go in the discussion, and whether they’re getting information that may be hard to compartmentalize their business models.

Under the duty of care, directors must be able to fully commit to their roles and become engaged with the company. Directors have to devote the time and the care to ask questions and feel empowered to weigh in on business decisions. It’s about corporate culture. It’s about the board collectively— the chair and directors coming together and establishing what they feel their culture is. It should be inclusive and welcome diverse opinions with some level of ability to disagree. The resolution process to get to an outcome is, at the end of the day, the company requires a decision.

Part of the board culture includes continuing training, taking the time and effort to stay current on the information needed to make strategic business decisions that benefit all stakeholders. That education could mean taking classes to become more proficient in finance, reading material information or engaging external experts regarding an acquisition. That, in turn, plays a key role in the business judgment rule.

Moreover, it’s important that there is adequate director training on the business judgment rule, as well as the duty of loyalty and duty of care, on an annual basis. Should a director either neglect or violate the standards of those duties, they can be individually liable in some situations.

These duties are there because society has determined that those are important values for a company. But they may not be what creates a sufficient ecosystem for good governance to occur. It could set the minimum expectations, but it’s only about how you employ them and how the individual directors and then the board comes together to implement them.

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