C5 Partners -
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Published on: 3/18/2002
Last Visited: 11/2/2007
There are two basic fiduciary duties of board members, said David Burton, partner at Dallas law firm Haynes and Boone L.L.P. "One is called a duty of care -- that's the one that's most likely to come under scrutiny in the Enron matter.The other is a duty of loyalty, which basically prevents directors from dealing in transactions in which they are personally involved."The duty of care requires directors to act in an informed and diligent manner, Burton said.To prevent negligence, they must inform themselves with all material and resources available to them, such as outside advisers, research and market intelligence.In a down economy, boards of directors are inevitably put under more scrutiny, and the Enron debacle only further complicates the environment."Directors are going to need to consider more aggressive actions in terms of rotating advisers and maybe having new auditors come in every few years," Burton said.
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"It's a very important job, and when there's a business failure, you very well may be put to the task of showing that you were diligent (in carrying out your duties)," Burton said.
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"That's when you start considering D&O insurance," Burton said.The board of directors represents the body of shareholders so when a business fails, the injured party -- usually stockholders left holding on to worthless stock certificates -- will hold responsible those representing their interests.Small companies not yet faced with such circumstances should still prepare to grow and adapt as the business matures, Burton said.However, no amount of insurance can absolve board members from their responsibilities."Serving as a director of a corporation is not a ceremonial function.It comes with responsibilities and duties ...The decision to serve should not be taken lightly," Burton said.
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