Corporate Governance: Duties of Care, Loyalty, and Obedience

Posted by Aaron Juckett, CPA, CPC, QPA, QKA on Sun, Feb 15, 2009
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When we last left our ESOP Corporate Governance discussion, we had discussed Responsibilities of the Board of Directors and More Responsibilities of the Board of Directors and shared some Board Member Job Descriptions. The Three Duties discusses the three legal duties that are the legal requirements and ethical guidelines of a Director:

  1. Duty of CareThe duty of care describes the level of competence that is expected of a board member, and is commonly expressed as the duty of "care that an ordinarily prudent person would exercise in a like position and under similar circumstances." This means that a board member owes the duty to exercise reasonable care when he or she makes a decision as a steward of the organization.

    The Three Duties stresses the importance of asking questions to ensure that you completely understand the issues and shares some practical director expectations:

    * Be interested in and understand the company's mission, goals and plans
    * Prepare for and actively participate in board and committee meetings
    * Review all board materials and agendas in advance
    * Be alert to potential problems and concerns
    * Request information from management, accountants and lawyers before making decisions
    * Investigate violations or irregularities in the governance of the company.
  • Duty of LoyaltyThe duty of loyalty is a standard of faithfulness; a board member must give undivided allegiance when making decisions affecting the organization. This means that a board member can never use information obtained as a member for personal gain, but must act in the best interests of the organization.

    Directors can face conflict (in fact or appearance) when they are on both sides of an ESOP transaction. The Three Duties discusses the best way to satisfy the duty of loyalty in the face of a potential conflict of interest:

    A director who has a potential conflict of interest can best fulfill the duty of loyalty and avoid an appearance of impropriety by complying with the company's conflicts of interest policy, which emphasizes disclosure (based on the idea that sunshine is the best disinfectant), evaluation by the governance committee or entire board and, finally, resolution of the issue.
  • Duty of ObedienceThe duty of obedience requires board members to be faithful to the organization's mission. They are not permitted to act in a way that is inconsistent with the central goals of the organization. A basis for this rule lies in the public's trust that the organization will manage donated funds to fulfill the organization's mission.

    The Three Duties notes that a director should "question programs, initiatives and plans that dilute a company's mission or take it off course" to ensure that the corporate mission is upheld and perpetuated.

Topics: ESOP Corporate Governance, ESOP, employee stock ownership plan

Aaron Juckett, CPA, CPC, QPA, QKA
Written by Aaron Juckett, CPA, CPC, QPA, QKA

Aaron is President and Founder of ESOP Partners and provides implementation, administration, and consulting services to hundreds of companies. He is a member of The ESOP Association (TEA) and the National Center for Employee Ownership (NCEO).

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