lest we forget...
The Duty of Care
Each publicly traded companys Board of Directors has a duty of care to its shareholders. That means that in making business decisions the Board must exercise reasonable care in the decisions that it makes for the company. Reasonable care has two elements. First, the Board must be acting in good faith for the benefit of the company. They must believe that the actions they are taking are in the companys best interest. Second, they must believe that the actions are in the best interest of the company based on a reasonable investigation of the options available. In other words, they must carefully consider the available options within the time and financial constraints presented before they make a decision or take a particular action on behalf of the company.
The Duty of Loyalty
In addition to the duty of care, the Board of Directors owes a duty of loyalty to company shareholders. That means that the Board of Directors must be loyal to the company and its shareholders and act in their best interest. The Board and its individual members may not act in their own best interest or engage in self-dealing while making decisions or taking actions on behalf of the company. The duty of loyalty is sometimes known as the business judgment rule because the Board is required to make its judgments in the best interest of the business.
Shareholders must remember, however, that even if the Board of Directors strictly adheres to both of its fiduciary duties of care and loyalty, business decisions may still be made that hurt that company. That is because many business decisions are inherently risky. The courts recognize this risk and do not engage in the business of second guessing business decisions that were carefully made in what was honestly believed to be the companys best interest. That said Boards of Directors are in unique positions of trust. They must, therefore, carefully exercise their duties of care and loyalty in their furtherance of their business goals. Then the shareholders, the Board members and the business will be protected
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