Directors owe these fiduciary duties to the corporation: care, loyalty, good faith, compliance and oversight. This article focuses on directors’ duties of care and loyalty, and provides guidance on what to do when there appears to be a conflict of interest between a director and the corporation.
Duty of Care
The Iowa Code defines the duty of care as “the care that a person in a like position would reasonably believe appropriate under similar circumstances.” This means that directors must make decisions on an informed, thoughtful basis. To comply with this duty, directors should attend meetings, actively participate in board deliberations, make sure the information provided to the board is adequate, and monitor key financial and other systems of the corporation.
Directors do not have to take on these tasks alone. They may rely on information, opinions and reports or statements, including financing statements, prepared or presented by officers or employees of the corporation, legal counsel, public accountants and committees of the board.
By carrying out their duties in an independent, informed and rational manner, the business judgment rule will provide protection from liability for directors even if things do not go well.
Duty of Loyalty
The duty of loyalty requires directors to have undivided and unselfish loyalty to the corporation. Directors must act in good faith and in the best interests of the corporation. This duty prohibits “self-dealing” by directors, which requires avoiding conflicts of interest and intercepting corporate opportunities.
A conflict of interest arises when a director is personally interested in a contract or transaction to which the corporation is a party. A corporate opportunity is a situation where a director becomes aware of some business opportunity as a result of his or her relation to the corporation. In this case, a director must first present the opportunity to the corporation for consideration rather than seizing the opportunity for himself or herself.
Conflict of Interest
A conflict of interest exists when a director has a familial, financial or business interest that conflicts with the interests of the corporation. A conflict can be an actual, existing conflict of interest, or it can be a potential or even perceived conflict. Conflicts make it difficult for a director to perform work for the corporation objectively and interfere with the exercise of independent judgment. Decisions or transactions that involve a conflict of interest are not protected by the business judgment rule.
When a conflict exists, the director should first make full disclosures to the board of directors. The board should then determine whether or not a conflict exists. If there is a conflict, the interested director should disqualify himself or herself from related discussions and decisions.
In short, directors should follow a few simple rules when acting as directors. They should act lawfully, think in terms of what is in the best interests of the corporation, do their homework, use common sense and avoid personal gain.