Within a board, there are three primary fiduciary duties: duty of obedience, duty of care and duty of loyalty. In this blog, the team at BoardPro will be looking into the duty of care and how directors can implement proper duty of care to perform better as well as avoid potential liability and legal concerns.
What is a director’s duty of care?
Duty of care refers to the fiduciary responsibility that company directors hold. The duty encompasses ethical and legal standards that directors must adhere to. Directors are required to make decisions in good faith, considering the betterment of the organisation they represent at all times.
“At a basic level, a director has a duty of care as outlined in law, fiduciary principles,” explains John Page, the managing director of Boardworks New Zealand. “But more than that, a director should care enough about the role to keep informed, be well prepared, make a genuine contribution to the board’s work and care enough to be critical of their own performance, seeking to learn and improve.”
Ultimately, the duty requires directors to be financially, ethically and legally responsible at all times.
How to execute duty of care as a director?
Directors must show a high level of discretion upon making decisions on behalf of the organisation. As directors are held liable, they must show sensibleness in managing the organisation's assets. This also means that they are required to make decisions and ensure that those decisions are their duty. Within such decisions, directors must review relevant information of the board, assess internal and external risks and opportunities to the company, provide strategic advice where it is due and conduct appropriate due diligence.
This requires that directors always act in good faith and make decisions in the company's service.
What does proper duty of care look like?
Although the term “duty of care” may appear relatively straightforward, it is an active effort for directors to act within it at all times.
More specifically, directors must:
- Be informed of the company's mission, vision and core values. They must remember that they sit at the top of the company and set an example for employees. They must act under the company’s values.
- Stay vigilant: while sitting at the top of the company, directors must keep an eye out for the operational side's ethics and the framework under which the company functions. Although it should remain the role of the managers, directors should keep an overview of whether or not the team is following the appropriate regulations.
- Be prepared and stay present: by ensuring that agendas are reviewed, values are upheld, and make sure to be actively present during board meetings.
- Pay attention to detail: during the process of decision-making by staying active in researching additional information. This should be done in order to make the correct decisions on behalf of the organisation.
- Get some help: by consulting with managers, lawyers and other necessary experts to find the best way to uphold proper duty of care.
Conclusion
A director accepts a fiduciary duty upon joining a board (whether by contract or otherwise). This means that they need to act in good faith for the company and make decisions for its betterment. Any breach of that fiduciary duty places board members and the organisation at risk.
Directors need to be actively present and active in informing themselves about their duty of care. They should regularly attend meetings and stay active participants in researching and developing their knowledge on the matter.
