Duty of Care (Board of Directors) - Explained
What is a Duty of Care?
Written by Jason Gordon
Updated at September 25th, 2021
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Table of Contents
What is the Duty of Care?How Does the Duty of Care Work?Academic Research on Duty of CareBack To: BUSINESS ENTITIES, CORPORATE GOVERNANCE, & OWNERSHIP
What is the Duty of Care?
The duty of care is a legal obligation that prohibits a person or an organization to act in a way that could foreseeably cause harm to others. It obligates an entity to adhere to a standard of reasonable care while performing an act. Standard of care is the attention, caution, and prudence that an ordinary reasonable person would use in the given circumstances.
How Does the Duty of Care Work?
It can be seen as a formalization of the social contract of not harming anybody knowingly. It is often defined by the jurisprudence and common law. If a person or organization fails to meet the standard of care while performing an act, that act is considered negligent. If that negligence causes any harm to anybody, the affected persons can file a lawsuit for negligence. However, the standard is not applied uniformly to all, as the expected level of prudence and reasonableness varies greatly. The rationality of an infant does not match that of an adult, similarly, the degree of expected prudence differs between an unskilled and a skilled person. In corporate law, the duty of care is a fiduciary responsibility for the directors of the companies. It obligates them to take decisions reasonably and with appropriate prudence. The directors need to make decisions based on all available information with a prudent judgment promoting the company's best interest. This fiduciary responsibility requires a director to act reasonably after gathering information using good and independent judgment. He or she may also invite expert opinion, refer to the meeting minutes and seek legal advice. Directors are also responsible for scheduling meeting for discussing budget issues, executive compensation, legal compliance, and strategic direction. Shareholders can file a lawsuit against the board of directors if the directors fail to fulfill the duty of care.
Related Topics
- What standards govern the actions of the board of directors?
- Duty of Candor Definition
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- Duty of Loyalty (Directors)
- Self-Dealing
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Academic Research on Duty of Care
- The responsibility to protect as adutyofcarein internationallawand practice, Arbour, L. (2008). Review of International Studies,34(3), 445-458. This article discusses the responsibility to protect the norm in international law. The history of the concept of the norm is contrasted with the doctrine of humanitarian intervention. The article also examines how and when the norm is applied and the role that UN institutions can play in its application.
- TheDutyofCare, the Business Judgment Rule, and the AmericanLawInstitute Corporate Governance Project, Hansen, C. (1992). Bus. Law.,48, 1355. This article addresses the application of the business judgment rule.
- Corporate Directors'DutyofCare: The AmericanLawInstitute's Project on Corporate Governance, Frankel, T. (1983). Geo. Wash. L. Rev.,52, 705.
- Thedutyofcareof corporate directors and officers, Eisenberg, M. A. (1989). U. Pitt. L. Rev.,51, 945.
- TheDutyofCareComponent of the Delaware Business Judgment Rule, Horsey, H. R. (1994). Del. J. Corp. L.,19, 971.
- Corporate power and responsibility: Issues in the theory of companylaw, Parkinson, J. E. (1995). OUP Catalogue.
- A good faith revival ofdutyofcareliability in business organizationlaw, Bishop, C. G. (2005). Tulsa L. Rev.,41, 477. The core fiduciary duties of care and loyalty have long been the most important and controversial theories of director liability in corporate law. The Delaware business judgment rule virtually eliminated duty of care, making it difficult for corporate directors to be held liable for poor decisions. The 2006 decision on the Walt Disney Company Derivative Litigation demonstrates just how difficult it is to prove director liability in the face of the business judgment rule and legal liability protections. The author argues for a rethinking of the good faith duty as a means to holding directors more accountable for misconduct.
- The relevance of thedutyofcarestandard in corporate governance, Bradley, M., & Schipani, C. A. (1989). Iowa L. Rev.,75, 1.
- Demise of the Director'sDutyofCare: Judicial Avoidance of Standards and Sanctions Through the Business Judgment Rule, Cohn, S. R. (1983). Tex. L. Rev.,62, 591. This article addresses the extent to which courts demonstrate too much deference to management pursuant to the business judgment rule.
- Negligence in the air: thedutyofcarein climate change litigation, Hunter, D., & Salzman, J. (2006). U. Pa. L. Rev.,155, 1741.
- Re-examining legal transplants: The director's fiduciarydutyin Japanese corporatelaw, Kanda, H., & Milhaupt, C. J. (2003). The American Journal of Comparative Law,51(4), 887-901.