When operating within the director role for a private corporation or LLC, it is vital that you are mindful of your fiduciary duties to the other directors and your entity. Future Supreme Court Justice Benjamin N. Cardozo underlined the importance of fiduciary duties in the groundbreaking 1928 case Meinhard v. Salmon:
"Joint adventurers, like copartners, owe to one another, while the enterprise continues, the duty of the finest loyalty. Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, it is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of the courts of equity when petitioned to undermine the rule of undivided loyalty by the ‘disintegrating erosion’ of particular exceptions."
This very high standard laid out by Justice Cardozo prevents director behaviors that may lead to dangerous outcomes, including corporate implosion, bankruptcy, or international scandals. For example, FTX founder Sam Bankman-Fried was recently charged with conspiracy and fraud for stealing customer funds to cover losses at his personal hedge fund and of conspiring to bribe Chinese officials to violate campaign finance laws.
Directors have fiduciary duties of loyalty and care to the company they serve and its stockholders. Under the duty of loyalty, directors must put the best interests of the company over their own personal interests when making decisions for the Company and evaluating opportunities. Under the duty of care, directors mut exercise care when making decisions as a director, based on sufficient information and a good faith belief that their decisions are in the best interest of the company and its stockholders.
So, what are best practices for fulfilling your fiduciary duties as directors?
• Adhere to the due diligence standard. Practice due diligence in evaluating significant negotiations, deals, contracts, hiring, investors, and business partners.
• Keep Track of Accountability Standards. Gino Wickman, author of Get a Grip On Your Business, recommends knowing the numbers your entity needs to hit per quarter or fiscal year in order to create clarity and commitment amongst leadership.
• Regular and Accurate Reporting. The company should hold regular board meetings where management provides information regarding the company’s business. An accurate description of board meeting minutes will determine how the company needs to succeed in the present time and in the future.
• Regular Board Meetings. Gino Wickman discusses the benefits of holding regular board meetings. Regular board meetings are important for non-employee directors who are not as close to the company’s daily operations. Even if the board consists of company employees, many decision-making issues come up in board meetings that don’t typically arise during the course of day-to-day business.
• Speak Up and Disclose Conflicts. Good governance, according to Jim Collins, author of How the Mighty Fall: And Why Some Companies Never Give In, emphasizes that good governance requires a director’s ability to speak up when acting on behalf of the company’s best interest. Board members should pay special attention to matters in times of conflict to ensure the corporation’s success.
Notes
This is a reference to “Traction: Get a Grip on Your Business,” Gino Wickman (Gino Wickman 2007).
This is also a reference to “How the Mighty Fall: And Why Some Companies Never Give In,” Jim Collins (Jim Collins 2009) and Meinhard v. Salmon, 249 N.Y. 458, 463, 164 N.E. 545, 546 (1928).
Michelle Aguilar, Law Clerk, BridgehouseLaw LLP
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