The Role of a Board

A Director's Fiduciary Duties

Under Delaware law, a director of the board has three basic duties:

1. Duty of Care: Informed decision-making based on all material information that's reasonably available to the director.
2. Duty of Loyalty: Acting or not acting on a disinterested and independent basis in good faith with the honest belief that the action or inaction is in the interests of the company or stakeholders. Disinterested means free of material, financial, or other benefits from the matter, except in their capacity as shareholders. Independent means no relationship with an interested party that could reasonably influence the director's decisions. A director should promptly disclose facts to the board that may lead one to question their disinterested or independent nature or mindset on a matter that's being considered by the board.
3. Duty of Obedience: The duty of obedience requires a director to avoid committing ultra vires acts, i.e., acts beyond the scope of the authority of the corporation as defined by its articles of incorporation or the laws of the state of incorporation.

Business Judgment Rule (BJR)

Delaware courts typically apply the BJR. To rebut the assumption that directors exercised the BJR, the plaintiffs must provide evidence that:

• Knowledge: Director was grossly negligent in not becoming adequately informed, or
• Interests: Director was motivated by interests other than those of the company's stockholders as a whole.

If that presumption is not satisfactorily rebutted, the Delaware court will, in general, not second-guess a board's decision unless the decision is seen as not related to a rational business purpose of the company.

A landmark case where the BJR rule was upheld - Caremark International versus Derivative Litigation, and a case where it was suggested that directors probably did not follow the BJR rule - Blue Bell Creameries' case.

As long as there is a reasonable, rational business purpose, an information and reporting system, a director has not been grossly negligent in accessing information from the system - or setting up the system, and is not motivated by other personal or extraneous factors that someone can show as inconsistent with a shareholders' interests, it is difficult to sue a director.

Provisions For Directors to Avoid Liability

1. Organization's Records: The directors can rely in good faith on the company's documents and the information presented to the board.
2. Exculpation from Personal Liability: The incorporation documents, the articles of association for a company, can include directors' exculpation from personal liability, This can potentially eliminate the directors' personal liability for monetary damages for breach of care.
3. Indemnification and Expense Advancement: Companies can reimburse or indemnify directors for expenses if they are sued by plaintiffs.
4. Directors and Officers Liability Insurance: Generally, in the US, companies can purchase Directors' and Officers' (D&O) insurance to protect the directors if someone accuses the directors of indulging in negligence or violation of the BJR. As long as there is no blatant fraud involved, the insurance company generally pays for the legal fees associated with the directors to defend themselves.

Note, this article is not to be taken as legal advice, and it's important to understand your regional applicable laws. Now that we've gotten this out of the way...

What Does a Board Do?

Oversee Management on Behalf of Owners: This is the most important job a board has. This involves:

1. Strategic Planning and Execution: Overseeing strategic planning and execution to create long-term sustainable value. This does not include short-term stock price maximization, though, the definition of short-term and long-term can be argued.
2. Management's Goals: Overseeing management goals, and setting the right KPIs.
3. Peer Groups: Overseeing the peer groups, i.e. the comparison groups to compare management with.

Oversee a Disclosure Policy: The board's responsibility is to oversee a disclosure policy to articulate to shareholders how the established goals align with strategy and how the company is doing in terms of progress towards achieving the goals.

Identify the Top Issues or Problems that the Board Needs to Concentrate on: This can be challenging and tricky depending on the context. It's very easy to get lost in the smaller procedural problems as opposed to focusing on the top key strategic issues and problems that the board should ideally keep an eye on.

Establish/Ensure Systems and Documentation are in Place: The board has to make sure that there are systems, especially documentation to set an agenda of focus, how the issues were considered, and the processes to evaluate the board's own oversight.

Counsel Management: Directors' job is a bit tricky. It's a balancing act - being a cop and keeping an eye on the company's management, and being a coach, i.e. counselling management. Most practicing directors would view their job as a coach as a more important job than that of a cop. Elaborating on this further... Many would agree that the CEO's job at the top is lonely and difficult, especially for large companies. And they typically need a sounding board for their ideas, especially vis-a-vis strategic direction. So, directors tend to serve as clustered advisors - the sounding board, that can provide alternatives to tough problems.

Rolodex of Contacts: Directors can also greatly assist the firm through their Rolodex of contacts. Contacts can be meaningful in various facets, including, identifying a merger partner, raising funds, helping the CEO get a high-value contract, finding the top talent for the company, and even helping the company through regulatory trouble.

Constructively Challenge CEO's Thinking: While this is not common, the board can also constructively challenge the CEO's thinking vis-a-vis stress testing their ideas. This can help look around the corners and the blind spots in the logic and/or the strategy.

Engage with Shareholders: This is a function of multiple factors, including, the company, industry, and jurisdiction. For instance, in the case of a private company board member, this is certainly less of a concern because a private company is usually run by the family. So, the CEO and maybe a few of the senior executives are effectively family members, and there's no obvious need to engage with them formally. However, for a director in a large public company, engagement with the shareholders is certainly a large part of the job.

Difference Between the Board and Management's Job

While the demarcation is blurred, there are overlapping and distinct responsibilities vis-a-vis management. The responsibilities are a function of various factors, including, the type of company - private vs public, not-for-profit vs for-profit, the CEO - some CEOs welcome more overlap, and whether the CEO is also the Chair of the Board.

In general, overlapping responsibilities include strategy formulation, risk management, and disclosure and accountability processes. In contrast, distinct responsibilities include the management's job to run the company on a day-to-day basis. The board has to communicate expectations regarding performance goals and make sure that the CEO and the other C-suites compensation and other incentives are aligned with those performance goals.

Getting Board's Job Done

So how does a board gets its' job done? Check out the next related article, "Board Committees".